Is Whole Foods Market A Buy Now?

With shares of Whole Foods (NASDAQ:WFM) trading around $85, is WFM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Lets analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Whole Foodsowns 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.

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T = Technicals on the Stock Chart are Weak

Whole Foods stock has made significant progress from the selling pressure that amounted during the Financial Crisis. The stock has retraced a bit from all-time highs reached just last year. 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 declining key averages which signal neutral to bearish price action in the near-term.

WFM

(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

35.03%

96%

92%

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

May Options

Steep

Average

June Options

Steep

Average

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’s 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

20%

46.34%

26%

25.49%

Revenue Growth (Y-O-Y)

13.71%

23.62%

13.63%

13.57%

Earnings Reaction

-9.7%

-5.85%

11.32%

7.56%

Whole Foods has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have expected a little more from Whole Foods’s recent earnings announcements.

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P = Poor 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

Kroger

Safeway

Supervalu

Sector

Year-to-Date Return

-6.01%

28.06%

45.11%

104.5%

16.12%

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

Conclusion

Whole Foods engages in essential food industry that provides highly demanded products to consumers in different countries. The stock has seen amazing rise over the years but has recently been met with some selling. The short-term trend seems to still be lower as investors are not impressed with recent earnings and revenue growth figures. Relative to its peers and sector, Whole Foods has trailed in performance by a wide margin. WAIT AND SEE what Whole Foods does in the coming quarter.

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