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Rodolfo Avalos
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I'm a long-term investor looking for both "Growth" and "Value" companies. With over 12 years of experience in the marketplace, my main focus continues to be on small and mid-cap companies in the U.S. as well as companies from China, since I believe China will play a bigger... More
  • What really makes some companies successful? 0 comments
    Jan 13, 2012 1:54 PM | about stocks: CMG, WFM, ISRG
    I love Wednesdays. It's not just any typical weekday for me, but it's the day that I get to feel I do my utmost effort to keep my body and my mind in a healthy & balanced state for one more week. The day begins with a grocery shopping list from my weekly kitchen check up in the morning, followed immediately by a stressful 8-hour shift at work that is rewarded midday with a "pit stop" to the nearby Chipotle Mexican Grill. This meal in turn provides the fuel for an intense 2-hour workout at my preferred gym during the evening. It finally ends with the pleasant experience of having a healthy dinner at Whole Foods Market prior to buying the groceries & food supplies for an entire week. All the while I contemplate the countless number of people that shop in a similar fashion wearing their workout clothing. Wash, rinse, and repeat. 

    I admit it. I'm all into organic food. I am a fan. I'm just one more in the long line of loyal customers and strong supporters of the "Food with Integrity" concept from Chipotle Mexican Grill and of "the vast selection of highest quality natural & organic products" from Whole Foods Market. Except during harsh economic times, I usually don't spare a single dollar when it comes to spending money in buying organic food, which oftentimes can be quite expensive and provides perspective to the old and heavily used term "Whole Paycheck" to describe the cost of shopping at Whole Foods Market. 

    In the organic world, people not only want to eat healthy (granted, I allow myself to eat the conventional burger & fries or slice of pizza here and there), but also feel healthy. The latter at times proves to be more powerful than the former in determining not only our food shopping habits, but also our overall well-being. To prove it, just recently my organic soul was shocked by an article that stated there is no evidence that eating organic or natural food is healthier for you. 

    I know, I can sense some sort of uncomfortable and unease feeling developing inside you, just the same way it did in me, but please keep reading. From a nutrition point of view, neither the FDA nor most physicians recognize health benefits from organic or natural food, and a product being organic doesn't automatically make it healthy. The answer isn't yet clear, but recent studies conducted by researchers over a 50-year time span of scientific articles about the nutrient content of organic and conventional foods led to the conclusion that organically and conventionally produced food items are comparable in their nutrient content. Although the research in this area is ongoing, you can easily understand why this evidence (or lack thereof) struck me right in the middle of my organic heart. 

    With this new (and somewhat disappointing) information, I tested whether my shopping habits would change in the following Wednesdays given the still high cost of organic foods. The first challenge came in the form of Tomatoes: Organic HotHouse Tomatoes at $3.99/lb vs. Conventional HotHouse Tomatoes at $1.99/lb. The organic ones had the following description: "The real deal, not hybrids. Bumpy, juicy and brimming with character. Some of these varieties may be descended from fruit our great grandparents may have eaten". Even though the organic ones were 100% more expensive than conventional ones, I still picked organic. 

    Time and again I encountered a similar situation, and time and again I chose organics. Why? Why did I do that? And why would Whole Foods put such an eloquent description for the Organic HotHouse Tomatoes and nothing whatsoever underneath the conventional label? Besides the obvious markup explanation from a profit point of view, the truth of the matter is that in my brain, I'm convinced of two facts: 1) eating organic foods makes me feel healthier, and 2) invariably organic food tastes much better than conventional food. Who can convince me otherwise? 

    There are several other reasons why shoppers would choose to buy organic rather than conventional: ethical & environmental reasons, and support of the local farmers are strong in the list. But at the heart of the explanation it's all about how we feel. Paying top dollar for high quality food has a profound psychological and subsequently physical effect on us. I assure you I am not the only one experiencing this. There is empirical evidence that explains why paying 50-cents for a painkiller might not be as effective in eliminating a headache than paying $5 dollars for the exact same painkiller. 

    The brain is powerful, and learning to manipulate it in the right way (placebo effect anyone?) can lead to constructive, positive and beneficial results. Businesses that realize this concept can use it and exploit it to their own benefit, and those that do it well usually become quite successful. Such is the case of Whole Foods Market and Chipotle Mexican Grill. In every conference call (such as in the Q3 2011), Chipotle makes emphasis on how important it's for them to engage their current and prospective customers in a meaningful way to help them understand where their food comes from, why "it tastes so good", and what the "Food with Integrity" concept is all about. 

    Whole Foods Market employs similar techniques all over their stores. It's all about informing their shoppers and firmly convincing them that their food is the best tasting and most nutritious food available. Whether this is scientifically true or not is irrelevant. They make you believe that the food you are eating is the best, and by additionally providing an environment that makes the whole shopping/eating experience pleasant, they ensure a long-term positive imprint in the brain from which it's very hard to deviate. This causes the deep loyalty of each and every one of the consumers that visits them. 

    I like both companies from a business standpoint. Not so much however from a stock-price point of view. They are both given extremely rich valuations (Chipotle has a 40x FP/E ratio and Whole Foods has a 28x FP/E) and that is considering their high growth projections (PEG ratios are 2.34x and 2.26x in Chipotle and Whole Foods, respectively). They do deserve to be richly valued, and although I believe they will continue to experience healthy growth in several years to come, I still feel they are currently priced for perfection. There's more downside risk than upside potential at this very moment. At one point in time, I ventured into shorting Chipotle from a pure valuation point of view, only to get my head handed to me in a silver platter. I learned my lesson the hard way. Now I would just wait for a significant pullback before considering investing in either one of them. After all, no matter how resilient a company's high growth is, there will always be some bumps on the road (think Intuitive Surgical back in 2010).


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.
    Stocks: CMG, WFM, ISRG
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