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3 Reasons Whole Foods Market Inc.'s Stock Could Fall

It's no secret that owning shares of Whole Foods (Nasdaq: WFM) stock has been a great long-term investment for many investors. But while the company has helped redefine what the grocery shopping experience can be, it has run into troubles as of late.

Before diving in, it's worth noting that I recently talked about three reasons I thought the company's stock could go up in the future here .

Source: SEC filings. 2014 results are from the company's first three fiscal quarters. Years 2011 to 2013 are for full fiscal years.

Part of this is understandable: as a company's base of stores grows larger and more mature, comps eventually have to come down. But management has mentioned that growing competition has something to do with it, and it's that competition that has investors worried.

Speaking of competition

When Whole Foods began offering up natural and organic food in the late 1970s, there wasn't much competition. In fact, lots of people thought the idea of a grocery store with such a focus going public was ridiculous. Since then, however, the stock has returned 2,790%.

They say that imitation is the most sincere form of flattery. But you could forgive investors for not being too flattered at the spate of grocers following Whole Foods' blueprint into the natural/organic market. Sprouts Farmets Market , Natural Grocers , and The Fresh Market have publicly stated that they can eventually have 1,200, 1,100, and 500 locations nationwide, respectively. Whole Foods currently has 389 stores, but believes it can one day grow into 1,200 locations.

If that expansion of competition were to occur, it would leave much less of the natural/organic market share for Whole Foods.

Source: E*Trade. Some earnings figures may include non-GAAP numbers.

Perhaps a better proxy would be to look and see that analysts expect Whole Foods to grow earnings by about 14% per year between now and 2017. While that's a healthy number, it's tough to say if a P/E of 25 is warranted.

The important thing to realize is that Whole Foods has the type of valuation that lends itself to exaggerated moves--both up and down. Should the company's focus on lowering prices of goods take time to filter down to customers, earnings could take a hit in the short-term, and that could send shares lower.

The bottom line on Whole Foods

As I stated above, I'm a big believer in Whole Foods. But it's important to acknowledge the serious headwinds the company is facing in the near-term. How it performs against these headwinds will go a long way in determining which direction the stock moves in the next three to five years--which is the minimum investing horizon we like to use here at the Fool.

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If you invest in Whole Foods for the long-run, there's definitely an expectation that the company's dividend will rise as its growth eventually ebbs. And that's ok, because the smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute.

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The article 3 Reasons Whole Foods Market Inc.'s Stock Could Fall originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Whole Foods Market. 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 .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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