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The Whole Foods Investment Experience

June 25, 2017


As I mentioned in one of my LinkedIn posts last week, the market does not care what price you paid for a stock.  In other words, the price you pay to buy the most wonderful company in the world still matters.  Go back and look at the stock charts of some tech stocks that took more than a decade to overcome their previous closing price after the tech crash in 2000.  It took Microsoft 14 years to top its previous high.  Cisco is nowhere close to its previous high yet the company is a much larger and more profitable enterprise now.  The stock market’s elevated level makes you wonder which of today’s “darling” stocks will take a decade of growth to overcome current price levels after the next market downturn.  Will it be Amazon, Tesla, Facebook, Netflix or another of your favorite holdings?


A quick note about my investing style. My clients know that I prefer diversified ETFs and mutual funds over picking individual stocks.  However, if someone has a strong interest and time to select individual stocks, I recommend that they limit their individual stock picking to 5-10% of their portfolio.  In my case, the bulk of my children’s college savings are in 529 plans but I do have Coverdells for each of the kids where I trade individual stocks.  I also have a small portion of my retirement money in a self-directed Roth IRA.


The "price matters" lesson was reinforced to me last week when Amazon agreed to purchase Whole Foods for $42 a share. On the day of the Whole Foods news, my oldest son had 361 shares in his Coverdell Educational Savings Account.  I had been purchasing Whole Foods stock and reinvesting dividends for him since January of 2014. It should have been a really happy day.  Yet almost 3.5 years later, he still had a $900 loss.  All because I paid $55.87 for the first 100 shares I bought in January of 2014.  In January of 2015 I purchased another 40 shares for $49.98.  The other 221 shares he owned were all purchases below the $42 buyout.  So, because I overpaid in 2014 and 2015, this investment was unsuccessful.


Why did I overpay in 2014 and 2015?  Study the history of the best growth stocks and you will find dizzying price drops when the market momentarily turns against them.  Amazon, Netflix and Apple have all had greater than 50% stock price drops in their history.  The tough part for an investor is to figure out if the company's management is skilled enough to overcome a disruption in the market, overcome new competition, survive a poor business execution or patch up a failed merger and get the company back on the growth track.  Fast-growing companies that hit a blip are sometimes called “broken” growth stocks.  Chipotle and Under Armour fall into this category right now.  Back in 2014, I thought Whole Foods was still a growth stock and could get its mojo back quickly.


What was there to like?  Beautiful margins for a grocer, affluent, young and loyal clientele, an excellent balance sheet with no long-term debt, brand and leadership in the growing organic food sector, 399 stores with a forecast for 1,200 stores in the U.S., a small international presence that could be expanded and a sterling reputation for excellent customer service.


What went wrong?  The price investors were willing to pay per share (P/E ratio) fell from 31.2 to 20.1.  The company added 31 stores in 2015 and another 25 stores in 2016 but them announced they were closing nine underperforming stores in 2017 and that a store count of 1,200 was no longer obtainable.  Competition got tougher, much tougher.  Organic food went mainstream and was cheaper at Kroger or Walmart.  Trader Joes, Wegmans and others offered a similar upscale shopping experience.  Whole Food’s nice margins meant that the prices were higher than the competitors and there was an ugly and well publicized overcharging investigation in New York.  Management devised a new lower priced grocery store concept called 365.  Whole Foods took on a billion in debt to buy back shares and mask the deterioration in overall profitability.  A lot changed over 3.5 years.


The silver lining to this investment experience is that I profitably traded Whole Foods for my own self-directed IRA buying shares below $30 at one point.  But two lesson stand out for me:


Price matters and “buy & hold” investors need to constantly evaluate their “thesis” for purchasing a company and see if it remains valid for the current market conditions.  Remember, the market doesn’t care what price you paid for a stock – changes may be warranted.


Think about it before your next stock purchase.




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