Event: WFM reports Q4 earnings tonight after the close. The options market is implying about a 5.5% move vs the 4 qtr avg move of ~7.5% and the 8 qtr avg move of ~5.75%. The stock has closed higher after 6 of the last 8 earnings reports.
Sentiment: Wall Street analysts are generally positive on the stock with 19 Buys, 11 Holds and 2 Sells with an avg 12 month price target of ~$107. Short interest sits at only 2% of the float.
Options Volumes / Open Interest: Open interest has been close to evenly split (a slight tilt towards calls), and option volumes over the last month have been close to evenly split as well. In the last week though, puts have been more active than calls.
The largest individual lines of open interest are in Feb16th expiration: 3700 of the Feb 90.50 Puts, 3600 of the Feb 88 puts, 32o0 of the Feb 98 calls and 3100 of the Feb 95.50 calls.
Price Action / Technicals: WFM has been a stellar performer over the past 3 years, more than tripling in that time frame. Here’s the 3 year chart:[caption id="attachment_22678" align="alignnone" width="618"] 3 year daily chart of WFM, Courtesy of Bloomberg[/caption]
The black line is the 200 day ma, and it shows the strength of the uptrend, as it has not been downward sloping the entire time. However, the stock has shown some weakness over the past 6 months, as it has not made a new high since the stock briefly moved over the $100 level in September.
Technically, the stock’s in no man’s land, between support around 88-90, and resistance at the round level of $100.
Valuation / Fundamentals: WFM has impressive secular tailwinds at its back, as the health / organic foods market continues to show strong growth in the U.S. (97% of company revenues are from the U.S.). The following table, from the company’s most recent quarterly release, shows same store sales growth over the past 15 years:
Consistent performance for such a long period. Whole Foods is the rare supermarket with brand value as well as good execution, as it spends almost no money on advertising but attracts an affluent customer base.
However, as usual with a trendy company, valuation is a concern. Here is the 5 year chart of the P/E:[caption id="attachment_22680" align="alignnone" width="499"] 5 year chart of WFM P/E, Courtesy of Bloomberg[/caption]
The company is projected to grow earnings 15-20% over the next 2 years, which is commendable growth, but worth paying 35x for it? Seems on the rich side compared to other stocks in this market.
Vol Snapshot: WFM implied vol is low heading into earnings relative to the past year:[caption id="attachment_22677" align="alignnone" width="639"] WFM 30 day implied vs. realized, Courtesy of LiveVolPro[/caption]
My View: Whole Foods has a bright future ahead of it given its market niche and strong brand loyalty. The stock has reflected that bright future with a roaring rally over the past 3 years. The stock seems richly valued here, but in a broader market that has the wind at its back, shorting a stock on expensive valuation is a dangerous game to play. We are going to stay away from a trade on WFM, as options look fairly valued ahead of the number.