Whole Foods and NetApp: Two Stocks to Watch

 |  Includes: NTAP, WFM
by: Cabot

By Timothy Lutts

I’m optimistic that the bottom of the May-June correction has passed, and that the market is now gathering strength in preparation for a new leg up.

I’m optimistic in part because so many people are pessimistic! I think the unrelenting media focus on the BP (NYSE:BP) oil leak has really skewed people’s perceptions of reality.

But I can’t call it a bull market until I actually see major market trends advancing again.

Still, I’ve been busy building a Watch List. Mine currently has 21 stocks on it, and today I’m going to tell you about the stock that’s been on my Watch List the longest … as well as the stock that was added most recently.

The graybeard is Whole Foods Market (WFMI), the leading retailer of organically grown food in the world. Whole Foods is prospering by being what Peter Lynch called a “cookie cutter” company; find a retailing concept that works, and then build more of them, while continually experimenting with tweaks to the formula.

It’s a formula that was perfected by McDonald’s (NYSE:MCD), which is still a decent investment for conservative money. And Whole Foods, which has grown revenues every year of the past decade and now has more than 295 stores in 38 states, the UK and Canada, is following the recipe perfectly.

Its profit margins in the last quarter were 3.1%, obscene for a grocery store. Its revenues grew 14% from the year before. Its earnings grew 52%. And after slowing store development in the recession, management is now expanding once again. Founder John Mackey, in fact, is one of the smartest, most forward-thinking, most human-focused retailers in the business today.

Fiscal third-quarter earnings will be reported August 3 and I have no doubt they’ll be terrific.

Technically, WFMI is attractive here because it’s pulled back to nearly touch its 200-day moving average in recent weeks. Also, 34, where the stock bottomed last week, is where it bottomed after gapping up after its earnings announcement in mid-February.

Long-term, I think it’s a winner.

The newest addition to my Watch List is a company that used to be called Network Appliance (which always made me think of toasters), but is now called NetApp (NASDAQ:NTAP).

NetApp recently earned an appearance in the Cabot Top Ten Weekly -- in fact it was named Editor’s Choice -- and here’s what editor Mike Cintolo wrote:

NetApp built the world’s first networked data storage appliance and has been a leader in the industry ever since; 49% of its business now comes from outside the US Increasingly, the business is not just about storing data but about making it instantly available to users of virtual infrastructures or cloud computing networks. Properly implemented, these technologies enable more convenient and more reliable data access with reduced costs. Business in the industry slowed dramatically in the depths of the recession, though NetApp managed to continue growing revenues on a year-over-year basis. And this year the industry has come roaring back; analysts have been increasing their earnings estimates for NetApp for both 2009 and 2010. Furthermore, after-tax profit margins were 15.6% in the latest quarter, the highest in more than four years. Properly managed, this company could go far.

Disclosure: No positions