New Trade WFM: YTD Winners Under Pressure, Who’s Next?

by Dan October 11, 2012 3:39 pm • Commentary

This may appear obvious, but there have been a handful of stocks doing a lot of the heavy lifting for a market that has defied gravity in the face of more than a handful economic headwinds, but buoyed by central banks intervention.  We have largely tried to stay away from “fighting the fed” since mid Sept, but at this point, it seems that more than handful of stocks that have done much of the heavy lifting for the broad market are starting to see some distribution (AAPL, AMZN, EBAY, DIS, LEN, SBUX).  We think this could become a bit of a trend, and possibly be exacerbated by any hiccups in earnings seasons. Names with high valuations and eye popping ytd performance (WFM & LULU) could be vulnerable to the sort of hits we have seen from names like PCLN & CMG on disappointments.

I want to take a look at WFM which is currently up 40% ytd, and only down 3% from all time highs, and set up for a defined risk bearish play heading into their fiscal Q3 report on Nov 7th

Fundamentals:  WFM is a high-flyer that has seen significant multiple expansion over the past few years.  It is a 40 P/E name with an expected growth rate around 20%, closer to names that trade 25-30 P/E.  Here is the 5 year chart of WFM P/E:

Moreover,  WFM’s future expected growth rate has come down a lot from 2010, when the company grew earnings 60%.  But one look at the stock chart shows that expectations are higher than ever.  That multiple expansion is at particular risk as we approach year-end, and fund managers become more interested in locking in their big year-to-date winners.  In addition, given that Whole Foods is still basically a purely American company, its exposure to the fiscal cliff is more significant than most large U.S. names.

Technicals:  WFM’s chart shows a chart that went from a relatively stable uptrend into acceleration euphoria mode over the past year:



It has traded outside of that trend channel on the back of multiple expansion (as opposed to stellar earnings results), and the stock seems due for a pullback.  Timing wise, the current price action has actually shown some weakness, as the stock is in the same place it was in June or July, while the market is 10% higher.  Distribution also seems evident on the volume profile, indicating more weakness ahead.

The one year chart demonstrates the fairly steep trendline off of the 2011 lows, the support at 95 and the target range near the previous gap low right above the 200 day moving avg.


TRADE: WFM ($97.35) Bought the Nov 95/85/75 Put Butterfly for 1.85

-Bought 1 Nov 95 Put for 3.07

-Sold 2 Nov 85 Puts at .69 each for a total of 1.38

-Bought 1 Nov 75 Put for.16

Break-Even on Nov Expiration:

-Profits of up to 8.15 btwn 93.15 and 76.85, max gain of 8.15 at 85, pay off trails off btwn 85 and 76.85

-Losses of up to 1.85 btwn 93.15 and 95 and btwn 76.85 and 75, Max loss of 1.85 above 95 and below 75


**What I like about this trade is that I can make up to 8.15 in a very wide range (btwn 93.15 and 76.85).