Organic food may get a lot cheaper
Wal-Mart, the world’s largest retailer, is teaming up with Wild Oats to sell a new line of organic foods.
The announcement has caused a sell-off in organic grocers like Whole Foods and Sprouts Farmers, as investors worry that increased competition could lead to lower prices and ultimately, slimmer margins and slower long-term growth.
But don’t try telling that to Whole Foods co-CEO Walter Robb. He told CNBC’s Courtney Reagan that Wal-Mart’s presence in the space is an “affirmation that this organic food marketplace continues to grow. I think it’s a $225 billion marketplace by the end of 2018. We’re the leaders in that space and I think we’ll continue to be."
Robb may say he's not concerned with Wal-Mart's push into organic foods, but investors have been troubled, at least when it comes to the stock performance of some of the biggest names in the industry. So far this year, the stock market hasn't been kind to organic markets, including Whole Foods.
|Company||Ticker||Market cap ($ billion)||Revenues (last 12 months, $ billion)||Price/Earnings (next 12 months)||2014 year-to-date return|
|Whoel Foods Market||WFM||$19.2||$13.3||29.2x||-13.8%|
|Sprouts Farmers Market||SFM||$5.4||$2.4||54.7x||-7.2%|
|The Fresh Market||TFM||$1.8||$1.5||22.1x||-10.9%|
And based solely on the charts, Ari Wald, head of technical analysis at Oppenheimer & Co., sees more trouble ahead.
"I don't think the time is now to be stepping into Whole Foods," Wald said. He is concerned that the stock has stayed below its 200-day moving average for much of this year and is currently testing the $50 per share level, which he sees as a key technical support level.
"I think that there's a very real risk that that $50 does not hold," said Wald. "I see downside risk at $40."
Wald sees $40 per share as an attractive entry point. Until then, he would not buy the stock.
"It's lagged the overall market," said Wald. "I think in this market environment, you want to stick with your leaders."
Chad Morganlander, portfolio manager at Stifel's Washington Crossing Advisors, agrees with Wald that there may be more downside ahead for Whole Foods. For him, the threat to company's stock isn't from Wal-Mart; it's from the stock's price-to-earnings multiple, close to 30 times, which he sees as being too high.
"I would be avoiding this stock," said Morganlander. "The $40 stock price would be a better place to look for entry. But, as a value investor, I would stay away."
"As you get this market rotation from high-growth … to value companies," said Morganlander, "you just want to avoid the name."
To see the full discussion on Whole Foods Market, with Wald on the technicals and Morganlander on the fundamentals, watch the video above.
Disclosure: Oppenheimer & Co. makes a market in the securities of Whole Foods Market. Washington Crossing Advisors owns shares of Wal-Mart Stores, and Stifel makes a market in the securities of Wal-Mart Stores.