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Be Wary of Whole Foods' Late-Stage Run


Whole Foods Market has been a great success story, but has the big money already been made?


Whole Foods Market (NYSE:WFM) has been a great success story since its initial public offering in January 1992, but since the start of the bull market in March 2009, the stock has surged 700%. This poses the question: Has the big money already been made?

Whole Foods reports fiscal fourth-quarter earnings after the close Wednesday. The consensus estimate calls for profit of $0.60 a share, up 43% from a year ago. Sales are seen rising 24% to $2.9 billion -- nice acceleration from 14% year-over-year growth in the second quarter.

Three months ago, fiscal third-quarter profit rose 26% from a year ago to $0.63 a share. Sales rose 14% to $2.7 billion. Same-store sales in the quarter rose an impressive 8.2%.

As of October 26, 2012, it operated 339 natural and organic food supermarkets in the United States, Canada, and the United Kingdom. It opened nine stores in the third quarter and expected to open seven additional stores in the fourth quarter for a total of 25 new stores in fiscal 2012.

There's no reason to think Whole Foods won't deliver another exceptional quarter of growth but whether or not it will be enough to help the stock remains to be seen. After a massive price gains, it's starting to look long in the tooth.

Keep in mind that major averages remain in a distribution phase -- not an easy environment for high-multiple stocks like Whole Foods to make headway. Whole Foods currently sells at 42 times trailing earnings and 34 times forward earnings.

While Whole Foods' huge price in recent years makes it a much riskier buy at current levels, competitor The Fresh Market (NYSE:TFM) could still be in the early stages of a move. It's a much younger company, still in the early stages of growth after its IPO in November 2010 at $22.

As of July 29, 2012, the upscale specialty grocery retailer operated 121 stores in 24 states in the United States. Most of its locations are located east of the Mississippi so there's plenty of room for expansion, particularly in California.

In August, the company reported profit of $0.28 a share, up 27% from a year ago. Sales increased 21% to $313 million. Same-store sales rose 8%. It opened five new locations in the quarter with plans to open 14 to 16 new stores in fiscal 2012.

Earnings are due November 28 before the open. Analysts are looking for profit of $0.26 a share, up 37% from a year ago with sales up 21% to $318.1 million.

Recent price and volume trends in The Fresh Market look pretty good. It's been consolidating gains since late August and is back above its 50-day simple moving average, currently working on the right side of a base. It's climbed to within 7% of its all-time high. Now that the election has passed, it's not out of the question the market could flash a buy signal soon. If it does, a fast-growing, new issue with solid institutional sponsorship like The Fresh Market could outperform going forward.

Editor's Note: This content was originally published on by Ken Shreve.

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