Whole Foods Is Not A Buy Here

Jul.10.14 | About: Whole Foods (WFM)

Summary

WFM trades at 25x earnings.

The company is growing by 3.4%.

The multiple is far too high.

Whole Foods Market, Inc. (WFM) has fallen aggressively and some people would use that alone as a reason to buy the stock, but WFM hardly looks like a buy even after falling as hard as it already has. WFM trades at 25x earnings, which in itself is rich, but when you factor in the growth rates it looks even worse. The growth rate for WFM has been deteriorating steadily, and those investors who once were very willing to pay up for high growth are questioning valuation.

Our analysis of the growth rate for Whole Foods Market suggests that the company is growing at 3.4% on an annualized basis, and based on its most recent quarter it is not growing at all on a quarterly basis. Our evaluation is based on trailing 12-month earnings results, and in our quarterly observation we compare the trailing 12-month results from this quarter to the trailing 12 months of last quarter to determine quarterly growth rates. Our yearly growth rate chart compares the 12-month trailing earnings this quarter to the trailing 12-month earnings for the same quarter last year.

Click to enlarge

Click to enlargeThe result is not pretty for people who expected Whole Foods Market to continue to grow as rapidly as it did back in 2012. To make it even worse, random walk theory might have you believe that Whole Foods Market is still an excellent investment, but the ultra high end grocery chain is proving to be a niche market, and it is facing economies of scale that are hindering its growth rate.

This comes from an observer who frequents Whole Foods Market, and many years ago I loved the stock, but right now the price earnings multiple for Whole Foods Market is at least twice what it should be given the growth rates that exist today.

Furthermore, according to our real time trading report for WFM, the stock is not finished declining because support levels are still well below the current stock price. Not unless Whole Foods Market tests longer term support as we have defined that in our real time trading report will we even consider Whole Foods Market to be a possible buy. If the right signals occur it might even be a much better short, even after the declines it has already seen.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receive compensation from the publicly traded companies listed herein for writing this article.