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Why Whole Foods May Not be a Good Pick for Your Portfolio

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A healthy diet is the key to good health. With widespread awareness about the importance of eating nutritious foods regularly, consumers are now ready to shell out extra money. How about applying the same principle for a healthy portfolio? Exiting the underperforming stock at the right time helps maximize your portfolio’s return. So, as an investor it would be a rational decision to shun from your portfolio a stock that has been witnessing falling share price and estimates, before it hurts your return.

Share price of Whole Foods Market, Inc. , the natural and organic foods supermarket chain operator, has declined roughly 9.4% year to date, and is now hovering close to its 52-week low of $28.07 touched on Feb 8, 2016. Moreover, the company currently carries a Zacks Rank #4 (Sell). This implies that analysts covering the stock are not convinced about Whole Foods’ performance in the near future. As a result, the Zacks Consensus Estimate too has witnessed a downtrend.

Why the Stock is Out of Favor Now

Despite posting the second straight quarter of positive earnings surprise on the back of cost control endeavors, the stock is no longer in investors’ good books. This Austin, TX-based company delivered second-quarter fiscal 2016 earnings of 44 cents per share that beat the Zacks Consensus Estimate of 41 cents but remained flat year over year. We also note that the top line improved by 1.3% during the quarter but at a rate lower than 3.4% registered in the first quarter. It also fell short of the Zacks Consensus Estimate for the quarter.

Whole Foods saw its comparable-store sales (comps) decline 3% in the second quarter of fiscal 2016 and 2.6% during the first three weeks of the third quarter. Comps had fallen 1.8% in the first quarter, following a decline of 0.2% in the final quarter of fiscal 2015.

Stiff competition has been weighing upon the company’s performance. More and more companies are entering as well as expanding their presence in the Organic & Natural food business. This may dent the company’s sales and margins. In fact, management expects comps decline of up to 2% for the full year.

Recently, Whole Foods was also under the radar of the Food and Drug Administration due to the violation of regulations for manufacturing, packaging and storing food at a Massachusetts plant.

WHOLE FOODS MKT Price and Consensus

WHOLE FOODS MKT Price and Consensus | WHOLE FOODS MKT Quote

Which Way are Estimates Treading?

Analysts polled by Zacks are less constructive on the stock. Over the past 60 days, the Zacks Consensus Estimate of $1.52 and $1.58 for fiscal 2016 and fiscal 2017 has declined 5 cents and 6 cents, respectively. Moreover, the Zacks Consensus Estimate for the third quarter has dropped 4 cents to 37 cents over the same time frame.

Needless to say, management at Whole Foods is not sitting idle. The company has been revamping its pricing strategy, with a focus on value offerings, along with the introduction of a new “uniquely-branded store concept”, "365 by Whole Foods Market”. But when it comes to the question of a “Healthy Portfolio”, it would be prudent for investors to look beyond Whole Foods, at least for the time being.

Stocks that Warrant a Look

Investors may consider better-ranked stocks such as Post Holdings, Inc. (POST - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and Wal-Mart Stores Inc. (WMT - Free Report) and ConAgra Foods, Inc. (CAG - Free Report) , both carrying a Zacks Rank #2 (Buy).

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