Name That Trade $WFM: Not A Whole Lotta Love

by Dan November 20, 2013 2:26 pm • Commentary

Back on Oct 28th I wrote about what appeared to be a fairly dangerous overbought condition for WFM’s shares heading into their fiscal Q4 earnings on Nov 6th (below).  In hindsight it is apparent that the stock was priced to perfection, trading at all time highs on the eve of its results that represented an inline quarter and lower guidance for full year 2014.  The stock had its largest single day decline in more than a year following the print and is now almost 15% off of the highs.

Just as the overbought condition caught my eye on Oct 28th, the seemingly near term oversold condition is catching my eye today.  First let me show you the chart from the post below on Oct 28th:

WFM 1yr chart from Bloomberg
WFM 1yr chart up to Oct 28th, 2013 from Bloomberg

Its fairly clear from the lower part of the chart (as I noted back in late Oct), that just because the RSI (relative strength indicator) was reaching fairly extreme levels (circled), it did not mean that the stock could not continue to go higher as it did in May and Sept. I guess the third time was a charm.

Flash forward to today (1yr chart below), and the RSI is hitting oversold levels (circled), which again doesn’t mean the stock can’t go lower from here.  The stock is at a fairly interesting spot to say the least. While the Sept/Oct excesses have been taken out, the stock is sitting near crucial near term support just above 55 (red line), which happened to the be the breakout level in Sept.  Also the stock is below the uptrend that has been in place since the March lows of the year, and for all intents and purposes, the chart looks broken.

WFM 1 yr chart from Bloomberg
WFM 1 yr chart from Bloomberg

On the fundamental side, even with the recent decline, the stock remains expensive trading at 33x next years earnings that are expected to grow at 15% on sales growth of only 13%.  Just today the company is confirming that they are testing a loyalty program offering a 10% discount on their “365” private label, I would suggest that this is not exactly a bullish act (defensive) and could be a sign of potential margin deceleration.

This is not a story I like down 15% from the highs and probably not until it got massively washed out on the downside.  While I don’t exactly think it is a good press on the short side right here, I would likely be inclined to do so on a failed attempt to fill that earnings gap.

That being said, I clearly recognize the cult-like status of the stock among investors, and there are probably plenty looking to play for an oversold bounce into the near year, which is why I queried my Fast Money friend Stephanie Link, co-Portfolio Manager of Jim Cramer’s Charitable Trust and Author of’s Action Alerts Plus product.  WFM’s decline has piqued Stephanie’s interest, and here are her quick thoughts on the quarter/guidance/stock:

1. Q guide not a structural issue
a. Consumer fickle
b. Some competitor
c. Still well positioned to benefit from natural/organic food trend which is growing annually 7-10% vs traditional/conventional food at 1-3%.

2. Missed on the comps but a 5.9% rate still very strong in a challenging consumer
a. EPS beat
b. Gross Margins beat
c. Operating leverage beat

3. Comp miss is partially one time in nature on pricing changes (which has been a 2 yr event and comes to and at the end of the year) and some cannibalization (mainly in Boston)

4. As they cycle through this: comps re-accelerate, 9-10% square footage growth continues, and continues to deliver double digit returns.

If you agree with Stephanie and you are inclined to get buy the stock here for a gap fill, I would prefer to create a band in which you would get long, both higher and lower, rather than take the risk of buying the stock at a fairly important technical support level.

Hypothetical Bullish Trade Structure in lieu of Long Stock:

WFM ($56.25) Sell Feb 52.50 Put & Buy Feb 57.50/62.50 Call Spread (package costs .10)

-Sell 1 Feb 52.50 Put at 1.42

-Buy 1 Feb 57.50 Call for 2.30

-Sell 1 Feb 62.50 Call at .78

Break-Even on Feb Expiration:

Profits: Btwn 57.60 and 62.50 make up to 4.90, above 62.50 make 4.90 or 8.7%

Loses: Btwn 52.50 and 57.50 lose the .10 premium you paid for the structure, while the worst case scenario is that the stock is 52.50 or below and you are put the stock ( down 6.5%) and start to lose plus the .10 in premium that you paid.

Trade Rationale:  If you are bullish on WFM and think the stock holds at current support and are inclined to get long the stock right here, this trade structure offers a more optimal entry point, BUT for that benefit you cap your gains above 62.50, or up 11%.




MorningWord 10/28/13:  Today’s Edition of Stock Market Vertigo Brought To You By $WFM

On a daily basis I scroll about 200 large cap one year charts of stocks that I trade.  I use this scroll to get a quick sense for where stocks have been and possibly try to draw the smallest clues for where they may be going based on a whole host of technical inputs.  As many readers know we do not rely on any one input to inform our trading.  We consider our process a bit like making a mosaic, and at the very least technicals help inform our strikes when trading options.

Through this quick technical work I am seeing what appears to be increasingly troubling price action by a small group of cult stocks that are starting to look stretched no matter what input you want to use to evaluate the underlying stock/company.  This morning’s edition of Stock Market Vertigo is brought to you by WFM.  A stock that we tried to make a bearish bet on back in mid August when the stock was nearly 20% lower than current levels (here).

The five year chart of WFM is truly a work of art – it looks like AAPL leading up to Sept 2012, with 1700% gains off of the 2009 lows, yet AAPL only saw 780% gains from the 2009 lows to its 2012 highs.

WFM 5 yr chart from Bloomberg
WFM 5 yr chart from Bloomberg

The breakout earlier this year above $50 (red line), and the ability for the stock to hold that level on a few tests suggests that the level will remain significant support for some time, especially when you consider the stock’s 200 day moving avg (yellow line) is also at that level.  Here is the thing – the stock is now 28% above that momentum indicator, most of those gains coming in the last 2 months alone, and the 14 day RSI reading (circled) is hitting severely overbought territory.

WFM 1yr chart from Bloomberg
WFM 1yr chart from Bloomberg

That type of overbought condition has generally been a precursor to further long-term strength throughout this bull market, but once in a while, it can indicate buying capitulation as well.  The 50% advance for WFM over the past 6 months has occurred without a major change in the company’s fundamentals (earnings and sales growth are actually decelerating year over year).  WFM is now a $25 billion supermarket company valued at around 30x 2015 earnings. Perhaps the most expensive supermarket stock of the past 10 years.  The stock reports earnings on November 6th after the close, and the stock’s reaction to the news, rather than the news itself, will likely be the best sign of the market’s appetite for more and more momentum stocks.