New Trade $WFM – U.S. Consumer Showing Signs Of Strain

by Enis August 14, 2013 2:10 pm • Commentary

In the past week, we’ve seen some serious concerns about the U.S. consumer from a variety of companies.  ARO, AEO and URBN all missed numbers, COST had a weak sales number, and this morning M missed earnings for the first time since 2007.

Consumer discretionary has been the leading sector for this bull market, so it’s not a surprise that it’s also the sector where valuations are the richest.  There are many great stories in this sector, but few great valuations.

Whole Foods is one such company.  WFM has dominated the health foods category over the last 5 years, rapidly spreading throughout the U.S. while maintaining its high margins in the low margin grocery business.  But as we’ve highlighted before, WFM is a 35 P/E stock with an expected EPS growth rate of about 15% over the next couple years.  That is very little margin for error, and especially expensive even relative to other high growth peers like SBUX (33 P/E with growth expected of closer to 20%).

WFM reported another solid quarter a couple weeks ago, but the stock was unable to make a new high:  

[caption id="attachment_29272" align="alignnone" width="635"]Daily chart of WFM, 50 day ma in pink, 200 day in black, Courtesy of Bloomberg Daily chart of WFM, 50 day ma in pink, 200 day in black, Courtesy of Bloomberg[/caption]

The good news on earnings couldn’t push the stock higher, another indication that there are fewer investors willing to buy this stock at current levels.  $56-$57 is obvious resistance going forward, while $54 (which now happens to coincide with the rising 50 day ma) has acted as support for the last month.  Longer term, the level to watch is $50.

As retail shows more signs of weakness (and not just low-end retail, as Macy’s indicated today), WFM is a name that’s vulnerable to selling based on recent price action and its fundamental backdrop.

TRADE: WFM ($54.63) Bought the Nov 55 / 47.5 Put Spread for $2.35

-Bought 1 Nov 55 Put for 3.01

-Sold 1 Nov 47.5 Put at .66

Break-Even on Nov Expiration:

Profits:  Profits up to 5.15 when stock between 52.65 and 47.5, max profit of at 47.5 or below

Losses:  Up to 2.35 between 52.65 and 55, max loss of 2.35 at 55 or above

Trade Rationale:  WFM’s next earnings release is in early November, so we went out to November for a put spread to give us plenty of time for the stock to work lower (with the added benefit that the earnings event provides an “out” if the stock is quiet until then).  Our target to take this trade off would be a move down to near the $50 level.