By JLP | July 12, 2007
Check this article ($) out from the front page of today’s Wall Street Journal.
John Mackay, the co-founder and CEO of Whole Foods Market, Inc., has been posting messages on the Yahoo! Message Boards under the pseudonym “Rahodeb.” Here’s one of his entries (you can find the original here):
You like to throw around numbers on this Board and berate everyone investing in Whole Foods long-term as “stupid”, “foolish”, etc. You constantly argue that investors would be better off investing in slow growth stocks like Kroger (growing at 6%) or certificates of deposit (producing 4% to 5%). Unfortunately your math is deeply flawed because you have never grasped the fundamental principle of growth and compounding. Compound growth over longer time periods and your argument completely collapses and is seen to be short-sighted and foolish.
For example let’s look at your logic on KR:
“lets take year 1, the person who buys 3 shares of KR will have technically made $1.53X 3 = $4.59 in EPS.. correct?/ now.. the person who bot 1 share of WFMI instead, will have “made” $1.66 in EPS..
so the person who made $4.59 is actually AHEAD of WFMI in year 1 by a whopping 200% on EPS.”
What happens over time, however, to your scenario above? KR grows EPS at 6% for the next 10 years and that $4.59 in beginning earnings grows to $8.22. Over 20 years it grows to $14.72. In comparison, WFMI starts out at only $1.66 but over 10 years at a 20% CAGR that grows into $10.09, surpassing KR’s performance by 22%. Over 20 years at a 20% CAGR the $1.66 grows to $63.64, surpassing KR’s performance by 432%.
Whole Foods high PE is based on 26 years of continuous growth and the belief that far more growth lies ahead for the company. Since its IPO 14.5 years ago in January 1992, Whole Foods sales have grown from $92 million to $5.3 billion–a CAGR of over 32%. Now you are entitled to your opinion that Whole Foods growth isn’t going to materialize over the next 10 to 20 years–that Wal-Mart, Safeway, Kroger, etc. are going to crush Whole Foods. Of course if that scenario plays out then certainly Whole Foods stock price is going to collapse and we’ll see it trading at a PE multiple at or below KR. However, if Whole Foods continues to grow at close to a 20% CAGR over the next decade or so then you’ll see the stock price continue to rapidly grow because the earnings are going to continue to rapidly grow. Obviously you don’t think Whole Foods is capable of maintaining rapid growth and you’ve bet against the company. I’m certain, however, that Whole Foods is going to grow very rapidly over the next 10 to 20 years and have invested accordingly. Time will tell which of us is right and which of us is wrong.
Hmmm… I wonder how he’s certain that Whole Foods is going to grow very rapidly over the next 10 or 20 years?
This kind of behavior doesn’t sit well with me.
Mackay, again under the nickname “Rahodeb,” even commented on a Whole Foods 8-K Filing regarding an executive’s employment contract.
Oh, and to top it off, he even posted on the message board for his competition and eventual acquisition target, Wild Oats! Of course, he had nothing good to say about Wild Oats:
It matters greatly, because the company won’t be sold, turned or some variation of the like.
Perry had financial incentives if OATS reached 20 on a takeover or 30 in a turnaround, those days are gone but expect a very happy medium between $1 and $5 before bankruptcy is declared.
Nothing changed when the recent stake was announced. Charts tell us only about the past–not about the future. Support is currently around $10, but after a few more quarters with low comps and either low or negative profits it will be seen by the Market that no deal is going to happen for OATS. When the Market finally becomes convinced that no one is going to acquire OATS at a price above $5.00 a share, we’ll see the price collapse due to OATS terrible fundamentals.
Investment stakes aren’t made for fun, but plenty of people make stupid investments. Over the last 8 years OATS stock price has increased 0% despite the recent gain. Why not? Because OATS has never made a dime in net profit. Look at their Balance Sheet–negative $84.5 million in retained earnings! That’s how much OATS has now collectively lost in its 18 years of existence. What a great record! Yucaipa will eventually sell its 9.2% ownership stake just as hundreds of other financial investors have done before them. Ignore the obvious at your fiscal peril.
We get tired of reminding those who simply speak as all knowing prophets about OATS future, but never back up their optimism with facts, logic, or well reasoned arguments. Spare us the redundant optimistic replies that will follow unless you can back up what you say with facts, evidence, and logic and we’ll spare you our posts as well. (Link)
Oh Foolish One–j7brink–OATS went public on October 23, 1996 and closed its first day of trading at $11.28. If you had bought and held this wonderful stock over the last 8.5 years you would have lost 6% of your money. Have you held this great company’s stock for the last 8.5 years? If not, then why not?
Oh Foolish One–j7brink–continue to hold your stock the next few years and wait for the market to fully recognize OATS wonderful P/S ratio that you value so highly and you will certainly lose more than 6%. Once the Market realizes that no one is going to bail OATS out and that the company is never going to make any money, the stock price will then collapse 80% to 90%.
How has the O”Wise One–Rahodeb–done on her/his Whole Foods investment over the last 8.5 years? Whole Foods closed at $12.26 a share on October 23, 1996. It closed today at $102.13. My investment in Whole Foods has increased 833% over the last 8.5 years. That’s a CAGR of 28.33% for 8.5 years. OATS has had a CAGR of negative .7% for 8.5 years despite it’s recent 50% increase due to takehover speculation from Ron Burkle. Pretty unbelievably bad don’t you think?
We both know why you won’t take my bet. No one is going to buy out OATS in the next 6 months and you would need to leave this Board. There is no other reasonable explanation. (Link)
j7Brink’s messages on this Board are simply “prophetic pronouncements”. He or she never backs up what he or she says with facts, evidence, logic, or well reasoned arguments. It is fun for me to take his or her message and turn it around by making only minor changes. My goal is for him or her (or at least others on this Board) to see how pretentious and ridiculous these prophetic pronouncements really are.
I have plenty of other posts as well in which I engage in original thinking and back up my conclusions with facts, evidence, logic, and well reasoned arguments. I’d be happy to make only these type of posts if/when j7Brink stops playing the pretentious prophet. Until then–well I intend to keep doing what I’ve been doing. Sorry if it bothers you. Just skip ahead to the next post or put me on “ignore”. (Link)
Interesting stuff, to say the least. This doesn’t look good for Mr. Mackay. Oh, and if you are interested, you can get Whole Food Market’s side of the story.