If you are thinking of initiating or expanding a position in an organic retail stock, the first two names that comes to your mind are probably Whole Foods Market (WFM, Financial) and Sprouts Farmers Market (SFM, Financial). As U.S. consumers are becoming more and more conscious about their health and fitness, the demand for organic product retailers are increasing, resulting in a very promising opportunity for the two mentioned companies. Just as a rising tide lifts all boats, even the increasing demand for organic food will boost the financials of both Whole Foods and Sprouts. But, which of these two looks more logical as an investment option? Here’s a look at that.
A look at fair value and MoS
GuruFocus provides a tool to calculate the intrinsic value (or fair value) using a DCF calculator. Intrinsic value is the present value of sum total of all possible income from a stock in its lifetime. If the intrinsic value of a stock is greater than its market price, the stock is said to have a Margin of Safety (MoS) which acts as a cushion against market’s uncertainties. Different investors have different investment techniques and some like to invest in stocks that have a positive MoS. The following image shows the MoS for both Whole Foods and Sprouts Farmers Market.
Source: GuruFocus
None of the stocks have any MoS available to them – while Whole Foods is currently 53% overvalued compared to the fair value, Sprouts is 187% overvalued. Even the business predictability for Sprouts is not available, while that for Whole Foods is a 4 star, suggesting that the chances of gaining from the stock are high. So, if we need to choose between the two considering their fair value and degree to which they are overvalued, Whole Foods is the obvious choice.
A few other factor
Now, the stocks may be overvalued compared to their fair values. But that’s not necessarily a bad thing. This doesn’t also mean that the stocks can’t rise higher. Fair value and market price are two completely different things. While fair value looks at possible income, market price is a factor of the markets willingness to buy and perception of the stock. That’s why looking at fair value isn’t enough. Here’s a look at a few other factors.
Source: Yahoo! Finance
If we look at price-earnings and price-sales, in both cases Whole Foods looks attractive. For each unit of earnings of Whole Foods, an investor will have to pay $31.64, whereas for Sprouts investors will have to pay $48.96. Similarly for each unit of sales of Whole Foods, investors will have to pay less. So, again Whole Foods turns out to be the logical choice. Both the companies are functioning in the same industry and are exposed to similar opportunities and risks. In that case it makes little sense for an investor to pour in more money on Sprouts.
Again, according to Yahoo! Finance analysts, Whole Foods’ stock can hit a high target of $67.00, suggesting a 32.2% improvement over current price. Compared to this, highest expectation from Sprouts suggests an improvement of 7.5% only.
Bottom line
To sum up, looking at all the factors it becomes clear that investors should invest in Whole Foods. The company is a pioneer when it comes to revolutionizing the retail space with organic food products. On the back of hard work and its concern about the health of its consumers, the company has grown significantly in the past, posing as a threat even to the largest retailer Wal-Mart (WMT, Financial).
