Is Whole Foods a Risky Investment?

With shares of Whole Foods (NASDAQ:WFM) trading around $38, is WFM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Whole Foods owns and operates a chain of natural and organic foods supermarkets. The company offers produce, grocery, meat and poultry, seafood, bakery, prepared foods and catering, coffee and tea, nutritional supplements, and vitamins. The company also provides specialty products, such as beer, wine, and cheese; body care products; educational products, such as books; floral items; and pet and household products. As of February 14, 2013, it operated approximately 340 stores in the United States, Canada, and the United Kingdom. Through its stores, Whole Foods provides products that are seeing increasing demand and will continue to do so for years to come.

If you splurged on a $15 plate of brown rice and kale at Whole Paycheck Whole Foods recently, you might have wondered to yourself: “How much does this compostable food container weigh, anyway?” And you might have worried that you’re paying for that weight. Well, your fears have been somewhat justified. This week, the city attorneys of Los Angeles, Santa Monica and San Diego announced that the company has agreed to pay nearly $800,000 in fines for overcharging its customers on weighed foods at 74 California stores, according to the San Fernando Valley’s Post-Periodical. The charges include, unsurprisingly, that the weight of containers weren’t deducted for self-service foods; that other foods weighed less than the amount printed on the labels; and that stores served foods such as kebabs and other deli items by the piece rather than by the pound, as is required by California law.

“What brought this investigation about was a lack of consistency throughout the state,” Santa Monica Deputy City Attorney Adam Radinsky said in an e-mailed statement to the Christian Science Monitor. “Cashiers were using inconsistent methods to measure goods and measurements were not always accurate. It led to a number of problems.” The total fines include $630,000 in civil penalties and $100,000 that will go to a statewide consumer protection trust fund. Another $68,394 covered the investigation costs, according to the Post-Periodical.

Of course, Whole Foods customers in other parts of the country will probably continue to wonder about those pesky containers. And a spokesman for the company said in a statement to the Christian Science Monitor that they get it right a vast majority of the time: “We cooperated with the city attorneys throughout the process, and based on a review of our own records and a sampling of inspection reports from various city and county inspectors throughout California, our pricing on weighed and measured items was accurate 98 percent of the time,” the company said. “While we realize that human error is always possible, we will continue to refine and implement additional processes to minimize such errors going forward.”

T = Technicals on the Stock Chart are Weak

Whole Foods stock has been pulling back over the past couple of quarters. The stock is currently trading sideways and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Whole Foods is trading below its rising key averages which signal neutral to bearish price action in the near-term.


Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Whole Foods options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Whole Foods options




What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options



August Options



As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Whole Foods stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Whole Foods look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)





Revenue Growth (Y-O-Y)





Earnings Reaction





Whole Foods has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Whole Foods recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Whole Foods stock done relative to its peers, Kroger (NYSE:KR), Safeway (NYSE:SWY), Supervalu (NYSE:SVU), and sector?

Whole Foods





Year-to-Date Return






Whole Foods has been a poor relative performer, year-to-date.


Whole Foods engages in essential food industry that provides highly demanded products to consumers in different countries. The company has agreed to pay nearly $800,000 in fines for overcharging its customers on weighed foods at 74 California stores. The stock has been pulling back over the past couple of quarters and is currently trading sideways. Over the last four quarters, earnings and revenue figures have increased. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Whole Foods is a poor relative performer. WAIT AND SEE what Whole Foods does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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