Wednesday, August 09, 2006

Chasing Growth at any Price - uh, like NOT!

I couldn't make up my mind about the title: I thought that "Recipe for Diaster: Growth at any Price" was too melodramatic. Nevertheless, it's a trap that many investors fall into.

I was reminded of this when I read this morning's paper and the Whole Foods (WFMI) decline was discussed in some detail. The three analysts in the paper (not the three stooges, no), suggested that Whole Foods was going to be able to grow its net income at about 15% p.a. over the next three years. That's pretty good growth, and it can make a fine stock pick IF (if) you don't pay too much for it.

The three stooges (sorry, analysts) then proceed to put a PE ratio on the projected earnings of between 35 to 39 and, voila, the target price of $60 to $70 is achieved.

PE of 35 to 39? Are we still on planet NASDAQ, circa 1999-2000? As I understand it, earnings growth for the S&P 500 is projected at around 11%, and has an aggregate PE of about 17. Whatever would make you double your projected PE (and then some) for growth only slightly higher than the average? And they can recommend this to clients?

Buying growth is fabulous! Paying too much: NOT! A recipe for mediocre returns, at best. Smart investors always watch for value.

The Confused Capitalist


Anonymous said...

The PE for Kroger and Walmart are about 16. Like it or not, these are the main competators of Whole Foods. What Kr and Wmt have done is add organic lines within the stores to take away some of the ambivalent shoppers in the US. Tom in Indy

CrossProfit said...

Wal-Mart (WMT) is trading slightly below the CP evaluation line. Probably due to image problems.

Kroger (KR) is sitting at the CP evaluation line.

There is no CP evaluation line for Whole Foods (WFMI). This is due to conflicting information. Stock is down to 47/48 and looks like it is still heading south. WFMI is a recent addition to the S&P 500. This could explain for the ridiculous exaggerated expectations (or not).

Disclosure: This comment was written by a CrossProfit analyst and is the opinion of On the house!

CrossProfit said...

Here is another take on Whole Foods. Like Starbucks, the decline is just beginning...


chocolate cowgirl said...

Ack I wish i read this before buying WFMI. The stock sank and performed poorly. The PE today is still 37.