Food For Thought

12/13/2002 12:00 am EST

Focus:

Ken Kam

CEO, Marketocracy, Inc.

Ken Kam, in the m100 Journal monitors the trading activity of Marketocracy's top performing virtual fund managers. This past week, they targeted food retailers. Marc Gerstein provides in-depth screening services on multexinvestor.com. His latest screen looks at a health-oriented food chain. Here are their reviews.

Ken Kam notes, "The m100 made a large buy of Safeway (SWY NYSE) last week, hoping that shares of the grocer have fallen as far as they'll go. Just a week ago, Safeway warned that earnings through 2003 would be hurt by slower sales and rising staff healthcare costs. Troubling too for the company is the increased competition from lower priced offerings at Wal-Mart and Costco.

"But even with weak sales and shrinking margins, Safeway was still an attractive pick for the m100 based on its valuation. The top group expects that SWY has bottomed out, and figures that the company's shares are worth more than Wall Street currently values them. At p/e and price-to-sales ratios well below industry averages, any improvement in the results of Safeway's cost cutting and acquisitions will make this position payoff for the m100.

"Second on the buy list was BJ's Wholesale (BJ NYSE), yet another company with operations in the retail food industry. The large m100 investment is banking on BJ's ability to profit from its lower priced offerings in the weak economy."

Marc Gerstein says, "Whole Foods Market (WFMI NASDAQ) owns a chain of natural and organic foods supermarkets. The company is, indeed, growing briskly, and more so than the typical grocery chain. Eearnings has been growing especially fast. That's the result of recently-opened stores gradually maturing and hitting their stride.

"But there's a lot more happening here than cost efficiencies. Expansion is part of the sales story. WFMI is still a small company. As of 11/19/02, it only had 139 stores in the US and Canada. Management stated that its goal for the 9/03 fiscal year is to increase square footage by 12%-14% and generate overall sales growth of 15%-20%. Given the existing-store base and expansion plans, it seems that WFMI still has plenty of room to grow, both due to expansion and increased growth at existing units.

"The Achilles heel, here, is valuation. Relative to other grocery chains, we get a lot with an investment in WFMI. However, that is balanced by the fact that we pay a lot. However, as growth companies go, the price here does not seem outrageous relative to the nature of the company we get. Not every stock appeals to every style. But if you favor the high end of the price-quality spectrum, WFMI seems like a good deal. Thus, although WFMI won't appeal to every style of investing, it is an attractive growth opportunity."

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