Sell Whole Foods, Buy McDonald's

NEW YORK (TheStreet) -- Whole Foods has been one of those stocks that I have always wanted to fall in love with, but just couldn't. Fundamentally, I value its healthy eating strategy and the company has demonstrated that is has an exceptionally sound business -- one that continues to grow despite severe economic concerns.

The challenge for me has been its stock price. I have always considered it expensive. The market, however, has had different ideas. Investors can't seem to get enough and remarkably, the stock has developed the same appeal as Chipotle where valuation metrics have become unimportant. But I think it has now become time to take a more serious look at where things are and where they may be heading.

Over the past five years there have not been many stocks except for Apple that have performed as well as Whole Foods -- a 90% increase including gains that at one point reached as high as 30% on the year. I will admit the company does fit the criteria of not only a growth stock, but one that has the components in place to justify its multiple.

However, as a value investor and more importantly one who also appreciates some margin of safety, coming to terms with a stock that is trading at 38 times earnings continues to be a challenge that is just too much to overcome. Recently, the company's management seems to agree.

Since the stock reached its 52-week high of $91.50 on May 4, it appears that some key insiders have decided it is time to dump some shares and lock in profits. However, none was more significant than the recent sale executed by CEO John Mackey: 50,000 shares at an average price of $90.

With the stock having closed more recently at a price of $83, clearly Mackey had made the right decision and at the right time. However, it now begs the question, should investors follow suit?

It goes without saying that one of the best indicators of when to enter or exit a position on a stock has always been by monitoring the activity of insiders, so why should Whole Foods be the exception?

It would be one thing if the stock were not already trading at an inflated valuation, but it is. There is no question it deserves a considerable amount of credit for having navigated through some difficult periods, but at this point, it is time to unload some shares.

It seems investors continue to show an inability to separate their love for a business or product with what translates into a good investment -- a perfect example being a cultish name such as Sirius XM , whose CEO, Mel Karmazin has also been dumping shares -- except for different reasons.

For Sirius, the recent insider sales coupled with some concerns over its competitive advantage imply a lack of confidence in the future -- one where it is even more critical to pay attention to not only the insiders, but also that of its biggest shareholder, Liberty Media , which is looking to acquire majority ownership of the company.

The fundamentals of Whole Foods, however, suggests its long-term outlook remains as promising as its performance over the past five years, evident in the level of loyalty its customers have shown during the height of the recession when it traded at a paltry $10.

One stock that investors should be buying instead is McDonald's -- particularly in uncertain times like these where safety always comes at a premium. Over the past decade the company has increased average annual sales by at least 6% while more than doubling its operating margins. Even more remarkable is the fact that McDonald's boasts an almost 30% operating margin over the past five years where its closest competitor comes in at just 14%.

Furthermore, the company boasts one of the strongest balance sheets within the entire market. Its solid margins coupled with consistent earnings make it one of the safest bets in severe bear markets -- one that also offers respectable dividend yield of 3.10%. While McDonald's fast food business might be the antithesis to the mission of Whole Foods, from an investment perspective it does present the better value -- topping also Chipotle.

Bottom Line

There is no doubt that Whole Foods has an excellent business and the recent selling of its CEO does not suggest that there is anything fundamentally wrong with the company. In fact, it is worth noting that Mackey's total ownership stake is quite significant in spite of his recent sales.

However, investors should not ignore the timing of these transactions as they showed that he sold right at the top of the valuation. While it may be a tad too late to react, it should serve as future reference that a price 40-times earnings will likely serve as a good exit point -- at least according to insiders.

For now, the stock still remains too pricey for me. It would likely take another 10% drop to get my attention.