All that said, the stock market has a mind of its own, which is sometimes overcome by greed and fear. Therefore, there is no telling how the market will act in the near term to medium term. What we do know is that Whole Foods didn’t react well when the market faltered in 2008/2009. Notice its performance at that time compared to peers.
Whole Foods Market data by YCharts
While Whole Foods has greatly outperformed its peers recently, that 2008/2009 time frame is downright scary. Let’s see if one of the company’s peers might present a safer long-term investment opportunity.
Whole Foods vs. peers
Whole Foods Market, Inc. (NASDAQ:WFM) has a market cap of $19.2 billion, making it very similar to The Kroger Co. (NYSE:KR) in size, which has a market cap of $18.7 billion. Like Whole Foods, The Kroger Co. (NYSE:KR) is focused on store-base expansion. And like Whole Foods, it wants to target the high-end consumer.
The Kroger Co. (NYSE:KR) recently acquired Harris Teeter to accomplish the latter, as the majority of these supermarkets are located in high-end areas. Not only that, but these are areas where The Kroger Co. (NYSE:KR) doesn’t yet have exposure. The Kroger Co. (NYSE:KR) is currently trading at 12 times earnings, making it cheap compared to peers.
Then there’s Wal-Mart Stores, Inc. (NYSE:WMT). Wal-Mart Stores, Inc. (NYSE:WMT) might be the most hated company in existence on Main Street, but if you polled investors, they probably wouldn’t hate it so much. Wal-Mart Stores, Inc. (NYSE:WMT) is a much larger company, with a market cap of $238.5 billion. It’s also much different than Whole Foods in regards to pricing, with a focus on the value-conscious consumer.
Wal-Mart’s grocery sales now account for 55% of its revenue. In 2003, its grocery only accounted for 24% of its revenue. Look for Wal-Mart Stores, Inc. (NYSE:WMT) to continue growing in this area.
Conclusion
Based on the chart above and valuations, The Kroger Co. (NYSE:KR) and Wal-Mart Stores, Inc. (NYSE:WMT) are much safer investments. However, this is a tricky situation. At the moment, the fact that Whole Foods is trading at 36 times earnings is justifiable. Strong upside potential exists since the company’s investments are still paying off and the high-end consumer remains healthy. But given my inclination towards capital preservation, I have to pass on investing in Whole Foods at this point. In my eyes, external economic circumstances present too many downside risks.
The article This Top-Notch Supermarket Chain Has 1 Big Weakness originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.
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