Whole Foods Investors Are Still Starving for Some Good News

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NEW YORK ( TheStreet) -- Shares of Whole Foods have gotten stale. And unless management makes some drastic changes , investors will have to stomach more losses -- that's at least until these shares, which are still expensive, trade down on more realistic expectations.

Whole Foods stock was trading at $38.79 on Monday at 11:45 a.m., up 0.7%. Shares have plummeted 33% on the year to date. But if you were one of the smart investors who acted on my sell recommendation nine months ago, you saved yourself a lot of pain. At that time, shares of Whole Foods traded around $56, or 31% higher.

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What's more, the stock then commanded a price-to-earnings ratio of 40. Wall Street assumed Whole Foods, whose name became synonymous with health, would deliver infinite growth. It's an assumption many investors regret today. Here's what I said at the time:

"I'm not discounting the fact that Whole Foods is a well-run company, one that operates at a high rate of efficiency. But at the same time I'm not willing to ignore that chains such as The Fresh Market and Natural Grocers have done quite well for themselves in a relatively short period of time. Not to mention Sprouts Farmers Market , which sprouted out of nowhere to post 24% revenue growth and strong margins."

These are still the main talking points today regarding Whole Foods. And I don't believe, despite the recent decline, that much has been changed to improve the landscape. In fact, things might have gotten worse.

Whole Foods was not available for comment. An email sent inquiring about the company's strategic positioning was not immediately returned.

The way I see it, to fight off these threats, management will have to spend more money in marketing expenses and store expansion projects. Cash flow and profits will take significant hits in the next couple of quarters. What happens to the stock as a result won't be pretty. For now, Whole Foods investors hoping for good news should instead look for shelter elsewhere. These share may not bottom until around $32.

Consider that even with Whole Foods' price-to-earnings ratio falling to a more rational level of 25, the stock remains too expensive . These shares are trading at a P/E that is 3 points higher than the industry average. Whole Foods is losing market share each quarter, but its stock commands a P/E 8 points higher Kroger . That suggests that growth will eventually come back. Kroger, meanwhile, is posting the same level of revenue growth (10% year over year) as Whole Foods. And Kroger has shown meaningful margin improvement.

For Whole Foods, I have not seen any response from management suggesting they know how to increase long-term cash flow, which is what investors are betting on. And cash flow is going to be hard to come by, especially with Walmart now having entered the natural/organic food business .