Big Printin’ – WFM: Digging out of a Whole Foods

by riskreversal October 6, 2016 3:45 pm • Big Printin'

On the open today Whole Foods (WFM) was trading within 1% of its 52 week and 5 year low. Then take-over chatter caused a 5% rip:

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

To suggest the technical set up in WFM is precarious is an understatement. The 10 year chart shows massive technical resistance at $30:

from Bloomberg
from Bloomberg

WFM is down 55% from its all time highs in late 2013, trading above a market multiple at about 19.5x expected 2016 eps of $1.50, equal to 2013’s eps print. I would add that despite flat eps over the last few years, annual sales have actually increased from $13 bn to an expected $16 bn this year. Food deflation and price competition have taken their toll on margins.

Sentiment in the stock is poor at best, only 6 Wall Street analysts rate the stock a buy, while 15 say it us a Hold and 5 at Sell, with the average 12 month price target of just about $1 higher than where the stock is trading.  Short interest is about 10% of the float.

So you get the point, it didn’t take much to cause shorts to cover.

Options volume exploded on the rumor that Kroger might be looking at the company, with calls 7x average daily volume.  The two most active strikes were both short dated, with 6200 of the Oct 30 calls trading, most to open and 6100 of the Oct 7th weekly 28.50 calls trading. The largest trade of the day was an opening buy of 2600 of the Oct 31 calls, with the trader paying 52 cents.

WFM is not expected to report earnings until the first week of November, But I would remind readers that the stock declined 9% on July 28th, the day after their disappointing fQ3 results, and then declined 5% on Sept 7th following competitor Sprouts Fresh Market’s (SFM) negative pre-announcement.