Whole Foods Markets (WFM)

[mr_o]

Why Whole Foods Stock Should Keep Bearing Fruit (Barrons)

Organic food can be good for your health – and portfolio.

Whole Foods Market (ticker: WFM ), the highest profile grocery chain that advocates against factory farming, is rising Monday after Macquarie analyst Bob Summers’ upgraded the stock.

Summers boosted Whole Foods to Outperform and increased his target price by $10, to $38, writing that “regardless of recent same-store sales and operational challenges, Whole Foods remains a best-in-class operator with an iconic brand and a management team that has proven successful over long periods of time.”

The shares, up 1.8% to $34.34 in recent trading, indeed look appetizing.

Whole Foods has had a tough run, with shares down more than 40% since their 2013 peak amid increasing competition. The stock is also down roughly 15% in the past year, hurt by disappointing same-store sales. However Summers argues that the bad news is reflected in the stock, which yields 1.6%, leaving plenty of room for upside once sales rebound. “Comparable-store sales are poised to improve (less negative) as we begin to lap easier comparisons.”

SunTrust Robinson Humphrey’s David Magee also thinks an inflection point is near. He raised his price target to $38 on Monday. He thinks Whole Foods will at least match analysts’ estimates when it announces fiscal third-quarter results Wednesday, “which would be a psychological win for the stock.”

Magee also anticipates “pockets of upside opportunity” to the consensus expectations in the second half of the year, thanks to “signs of more sophisticated pricing and significantly easing comparisons. Expectations appear low heading into the release and we remain upbeat towards Whole Foods’ long-term outlook.”

Whole Foods has been cutting costs. But with selling, general and administrative costs per square foot about twice that of rival Kroger ( KR ), it can do much more to streamline operations and use savings to lower prices.

With Whole Foods long established in higher-income enclaves, the company has been diversifying, recently opening smaller “365” stores in the vein of the popular Trader Joe’s model. The new format’s focus on Whole Foods’ private-label offerings will help it keep prices low—and boost margins—while remaining innovative in the fiercely-competitive organic food space.

I'm not sure I share the views of Barrons.