Three Reasons to Sell Whole Foods Market, Inc. (WFM)

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I’m going to attempt something a little odd today, Fools. Even though Whole Foods Market, Inc. (NASDAQ:WFM) makes up 7% of my real-life holdings, and I recently wrote about why I’m holding Whole Foods stock in my retirement portfolio, I’m going to be giving you three reasons to consider selling the stock today.

Whole Foods Market, Inc. (NASDAQ:WFM)

Why am I doing this?

Earlier this year, Nobel Prize winner Daniel Kahneman visited Fool HQ in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we are just deluding ourselves.

Source: David Shankbone, via Wikimedia Commons.

It got me to thinking about how I don’t write enough about the risks of owning the stocks I own. So, though I don’t plan on selling my Whole Foods stock anytime soon, I think it’s healthy for me to practise and model this behavior.

1. The competition is catching up.
Two years ago, I did a little experiment. While many people referred to Whole Foods Market, Inc. (NASDAQ:WFM) as “Whole Paycheck” because of the price of the company’s food, I thought the moniker wasn’t fair. Organic food is almost always going to cost more than the conventional variety.

And as you can see here, in 2011, Whole Foods’ organic price points were far superior to those of Safeway Inc. (NYSE:SWY) and Harris Teeter Supermarkets Inc (NYSE:HTSI) and others. Organic food bought at Whole Foods was — on average — about 27% cheaper than the competition.

But I repeated this experiment this summer, and things have changed. Safeway Inc. (NYSE:SWY)’s decision to go all in on its O-branded organic line has helped it pull into a virtual tie with Whole Foods Market, Inc. (NASDAQ:WFM) from a pricing point. And Roundy’s Inc (NYSE:RNDY) is experimenting with a new type of Whole Foods-esque grocery store dubbed Mariano’s Fresh Market. This, too, was able to offer organic goods at prices points virtually identical to those of Whole Foods.

If this trend continues, savvy customers may choose to patronize the competition more often, which could slowly erode Whole Foods Market, Inc. (NASDAQ:WFM)’s business.

2. It’s an expensive stock.
Let’s say that, over time, Whole Foods is still able to maintain solid revenue streams in the face of mounting pressure. Even if that’s the case, it doesn’t mean Whole Foods stock is a great pick for your portfolio.

As it stands now, Whole Foods Market, Inc. (NASDAQ:WFM) — along with Harris Teeter Supermarkets Inc (NYSE:HTSI) — is the most expensive of the major U.S. grocers. Take a look at how the company stacks up in terms of both price-to-earnings and price-to-free cash flow.

Whole Foods 38 25
Harris Teeter 25 85
Roundy’s Inc (NYSE:RNDY) N/A 6
Safeway 9 7
Kroger 13 24

Source: Yahoo! Finance, SEC filings. N/A=Not available due to negative earnings or free cash flow.

As it stands, Whole Foods Market, Inc. (NASDAQ:WFM) has a little more than one-third of its public goal of 1,000 North American stores. That means there’s a lot of room for growth, both in terms of stores and increasing same-store sales.

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