7 Core Growth Stocks for Your Portfolio - Whole Foods
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors can prime their portfolio for success by building on a collection of core growth stocks. Remarkable businesses with the potential to deliver a decade or more of great returns. But to be considered a core holding, a company requires 1) a sustainable competitive advantage and 2) a visible growth trajectory. In this series, I'll present seven companies that can perform that role.
Imagine the Whole Foods Market (NASDAQ: WFM) experience. When you walk into a store you see bright produce arranged by color, old crates and hand painted signs while greeted by helpful employees. It's a formula that has worked for Whole Foods and resulted in handsome profits for shareholders.
Why it's a core stock
Consumers are increasingly engaged when they shop. Today, shoppers make decisions based on their values and awareness of health and environmental concerns. This has created a boom for the organic food industry. Last year, organic grocery sales exceeded $30 billion and that figure is projected to double over the next decade.
As a pioneer in organic food, Whole Foods is best positioned to exploit this trend. Management sees room to triple its current store count and open over 1,000 locations in the United States. Plus, the company is ramping up its international expansion with a foothold in Canada and the U.K.
But, new data suggests that this target may be too low. On the company's last conference call, management hinted that they're seeing minimal sales cannibalization in markets that were once thought to be saturated markets, such as Boston. In addition, Whole Foods is moving to smaller stores under 40,000 square feet rather than the 50,000 square foot behemoths they built previously. This new strategy will allow the company to move into smaller markets.
Of course, great growth projections are worthless if the company can't fend off rivals. Whole Foods' reputation for its quality product and shopping experience represents a competitive advantage that competitors can't match. Today, customers want assurance that their food is organic, natural, and sustainable and this is why they're turning to a trusted grocer like Whole Foods.
But even if you don't believe the hype, the numbers speak for themselves. Over the past two decades, Whole Foods has increased revenue at a 25% compounded annual growth rate. Same-store sales have increased 7% annually over the past ten years. And looking at the bottom line of the company's financial statements, Whole Foods' net margins are two to three times those of traditional grocers.
Risks to out watch for
Of course, even a great growth story like Whole Foods comes with risks. Investors have to keep a close eye on the business to ensure the safety of their investment. And in this industry, everything comes down to competition.
Big box retailers are moving into the space. In June, Wal-Mart (NYSE: WMT) introduced its new fresh produce project. The initiative plans to purchase fruits and vegetables directly from growers under the guidance of the company's produce experts. Wal-Mart plans to roll the project out to 3,400 locations with weekly quality checks and regular staff training programs.
Don't dismiss a company with a $250 billion market capitalization and the economies of scale that brings. But, while Wal-Mart will likely be successful with this initiative, it's a bigger threat to traditional grocers, like Safeway and Kroger, who are competing for the same customers.
In contrast, investors should be more worried about the competition that's developing within Whole Foods' niche. Over the past few years, we've seen a rash of industry IPOs including Natural Grocers by Vitamin Cottage and Fairway Group Holdings.
The Fresh Market (NASDAQ: TFM) is the largest of these competitors and the company has posted impressive results since its IPO in 2010. Last quarter's revenue and operating income increased 20% and 21.7%, respectively. The company also reported an impressive 5.7% jump in same store sales.
With management planing to open 500 stores nationwide, it's only a matter of time before the company starts infringing on Whole Foods' territory. While Whole Foods has the scale to deal with these threats, it will come at the expense of profit margins.
Foolish bottom line
Whole Foods is a company that combines exceptional growth with exceptional pricing power. That's why, it should be a core position in your portfolio.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!