Wednesday, April 1, 2009
(Cont'd from above)...

Jim (cont'd):

I want to try to help teach you to think like I did at my hedge fund… not so you can know whether you should buy Kroger or Whole Foods… but so that you can look at stocks the way that a sophisticated investor would… so you use the same methods that I used to make so much money at my hedge fund… we are trying to figure out what is known as the world view… the world view for the next quarter… could it be that the defensives like Kroger and Proctor have gotten too cheap… and the more aggressive, more cyclical plays like Whole Foods or Freeport, have gotten too expensive… or perhaps the huge rally in Whole Foods and the decline in Kroger was the market saying look things are getting better not worse… is Whole Foods like Best Buy where you buy the stereo equipment here… the ones that people are willing to pay up for… with Kroger as a kind of more expensive Family Dollar Store, I mean think about it.

Here we go… look at this… this is Whole Foods Organic Broth… this is the Organic Broth that you got at Kroger.. .they don’t seem that different… I mean a lot of these things seem exactly the same… tomatoes, tomatoes, right… at the heart of all of these questions… by the way, this whole group that we matched with this… this was $20 more at Whole Foods than it was at Kroger… now we see… these are the questions that you need to know whether the moves in these stocks were based on what is called micro-data… meaning information about each company… did Whole Foods just go higher cause it finally started to execute well… did Kroger decline because it wasn’t doing well itself… or are these moves macro-issues, meaning big picture economic factors… can these two stocks tell us something about how the broader economy is doing… or is this simply a case of Whole Foods doing better than it used to be… and we extrapilate nothing from it… like sometimes that was the case at my hedge fund… I would literally have these meetings at least once a day where I would pit two analysts against each other… just let them have it… and decide which over arching theory, which world view was right for the new quarter… it was not academic… tens of millions of dollars were on the line with these kind of judgments… and if you worked for me, and you didn’t take the process seriously, or you didn’t know my answers, then I showed you the door, hitting you with a bottle of water on the way out… I am trying to bring that same level of rigor to the show… without the water bottle being thrown at you of course… this is not something that would come up if I simply interviewed money managers and asked them if they like… we are with Joe Blow from the something, something fund… do you like Colgate more than Proctor… yes, I like Colgate more than Proctor… how do you rate it… I rate it to outperform… why do you like it… low PE… I can do it… sister, mother, I can play everything… but now I let others perform that exercise.

So, let’s go through the process and see what if anything these two stocks are saying… first we look at the micro picture… Kroger has been taking share… good supermarket, increasing its margins… meaning the percentage of every dollar of sales it becomes a profit… and it has kept its pricing low to compete with Wal-Mart… this is a company that is jugging along with decent consistent growth and getting pretty much everything right… Kroger is a good operator… but it still went down… that gives credence to the macro case that people are selling this one because people think that we are coming out of a recession.

Whole Foods, harder to tell… this is a company that has been in a decline for years… its same store sales growth has been decelerating since 2004, sales per square foot declined in both 2007, 2008... just the opposite of Kroger… since 2006 Whole Foods has been the classic example of momentum stock that has lost its mo-jo… down 77%… 2008 alone… and then the stock really turned around this quarter… we want to know whether the company turned itself around or whether investors are simply buying it because they think we are coming out of a recession… they believe that consumer confidence is recovering… and they see the rich spending again.

So which is it… six of one, half a dozen of the other… Whole Foods beat the streets estimation when it reported last quarter… the company made it very clear that cost containment is at last important, sort of like a club… and it showed us by eliminating the dividend… Whole Foods gave its share holders some reason to believe that their long national nightmare is over, to quote my friend buddy pal Nixon… but I don’t know if they did well enough to justify the kind of rally that this stock has had… maybe it never should have been that low in the first place.. so what did we learn from this process… Kroger tells us that it went down because we are going into a recession… camp is losing ground… not enough adherence of the bad recession theory anymore… because the company didn’t do anything wrong… people are selling it because they think the recession is going to come to an end… Whole Foods, while it is improving, and while it certainly ranks highly on the great restauranteur Danny Meier’s Hospitality scale… I think is saying that we are coming out of a depression… I don’t think the move is at all about the micro… it has to be about the macro… things are getting better.

Hey, does that mean that we got to go buy Whole Foods Market Inc. (WFMI) or Kroger Co. (KR)?…   No, no, that is not the whole point of this essay… I actually think the opposite is true… we are trying to use these stocks to figure out what the markets attitude will be over the second quarter… I believe that while Whole Foods now trades at 21 times earnings… it is always going to be more expensive than Kroger… which trades at 9.6 time earnings… I think you would be a pig if you caught this huge 85% move here… I mean come on… business isn’t that much better… that is the whole point… it went higher in part because the world view of most investors changed… similarly Kroger didn’t go down because of Kroger, it went down because investors were selling the recession resistant stocks… I think maybe selling them too hard.

Here is the bottom line…

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