Options Trade - Whole Foods Market
Friday August 10, 2012

Whole Foods Market Price Target A Winner!

**OPTION TRADE: Buy the WFM Jan 2013 100.000 call (WFM130119C00100000) at or under $5.50, good for the day. Place a protective stop limit at $1.80 and a pre-determined sell at $11.00.

by Ian Harvey

August 10, 2012


It is becoming apparent that there are more health-conscious people willing to pay more for what they think is better quality food and selection! And it’s clear that a growing segment of the population believe that it works for them when taking into account the growth in companies like Whole Foods Market (NYSE: WFM).

And it appears that a strong trend going in this direction could turn into a profit opportunity in the short term.

”Consumer Defensive” – the Exception

Whole Foods Market belongs to a market segment called “consumer defensive.” The name refers to investors’ assumption that, while a recession or downturn is likely to push spending lower for optional or “discretionary” goods (such as accessories and high-end clothing), everyone will still need food — and, therefore, grocery stores should continue to do well. A quick comparison of Wal-Mart versus Coach (NYSE: COH) during the 2008-2009 recessions highlights the difference between the two kinds of companies nicely.

However, defensive stocks are usually not as attractive during an economic expansion and/or a bullish stock market. At those times, traders are more interested in stocks likely to grow, with big “moats” and wide margins — and most defensive sectors fall short in those measures. But within each group, there are always exceptions to the rule: companies that have been gaining market share, expanding margins and disrupting the old business with something new.

WFM is therefore of particular exception that will provide the necessary requirements for the options trade recommended. In the next chart, you can see how WFM compares to its major competitors since the bull market emerged in early 2009.

Peer Comparisons

Now, relative strength compared to competitors is great — but expectations for the future are just as important. WFM has been performing very well over the last three years, but it’s actually a turnaround story following a disastrous series of mistakes from 2007 to 2008. The company has finally reached the point that shares are creeping just above their 2005 highs. And it has made amazing progress cleaning up its balance sheet while continuing to grow.

WFM has twice the operating margin of its competitors and has a moat in the form of a strong brand that provides some protection against erosion of its growing market share by larger national chains. Assuming that margins will remain at current levels and the trend of consumers willing to pay more for better food will continue to rise, I feel that the company is likely to be a winner through 2012 and 2013.

Reasons That Supports WFM Investment

The jump in Whole Foods stock can also be attributed to both its quarterly earnings and its revved-up outlook. The company reported earnings of $0.63 per share topping estimates of $0.61 per share, up from an EPS of $0.50 a year ago. Revenue rose 13.6% to $2.727 billion, slightly missing expectations of $2.733 billion. Inventory management and better store-level performance helped to shelter Whole Foods from a decline in consumer confidence. It is also notable that gross profit rose 15.6% to $981.4 million and comparable-store sales were up 8.2% with identical-store sales up 8%.

To be fair, comparable-store sales did decline from 8.4% in the same quarter last year, but the small differential is insignificant and the takeaway is that strong same-store growth is continuing. Although Whole Foods did not beat estimates by all that much, amidst decreasing consumer confidence and a struggling economy the fact that consumers were willing to pay more money for products provided by Whole Foods is a signal of a strong customer base and a strong business.

No less important was Whole Foods' optimistic outlook including development of new stores and raised expectations. Currently Whole Foods Market operates 329 stores in the United States, United Kingdom, and Canada. The grocer opened a record nine outlets during the quarter and plans to create six more this year. They outlined a plan to build 25 in 2012, 28 to 32 in 2013, and 33 to 38 new stores in 2014. As a reference point Whole Foods only built 18 stores in 2011. In total, 76 stores are being developed (or potentially developed) including the six more planned for this year.

Whole Foods' lucrative business goes beyond its industry. Their placement in urban areas has been an excellent strategy and is one of the reasons why they have not suffered from a halt in consumer spending. Even more appealing is the minimization of European risk. The grocer controls stores in America, Canada, and the United Kingdom, meaning that the problems in the European Union have little impact as no stores are located on the continent. Though some exposure exists, conditions in the U.K. are much more stable than they are in Western Europe, leaving Whole Foods relatively shielded from eurozone downside.

I also believe that WFM has a smaller exposure to the rising prices of commodities like corn because of the nature of its customer demographic.

After reporting earnings on July 25, WFM erased the prior breakout to the bottom of an emerging channel. Sales were up 14%, and profits jumped 32% compared to the same period last year. Most important, same-store sales growth is running at nearly 10%, a figure that’s almost impossible to believe when compared to other stocks in the sector.

The stock has stopped at resistance on the top of the new channel, but I think it’s likely to break out in the short term. Based on the channel, the short-term target is $105 to $107, where I expect to see some profit-taking. You can see the projection and current resistance in the next chart.

Analysts Upgrades

Morgan Stanley upgraded shares of Whole Foods Market from an equal weight rating to an overweight rating in a research note released last Friday morning. They currently have $110.00 price target on the stock.

A number of other analysts have also recently weighed in on WFM. Analysts at Zacks reiterated a neutral rating on shares of Whole Foods Market in a research note to investors on Monday. They now have a $97.00 price target on the stock. Separately, analysts at Jefferies Group reiterated a buy rating on shares of Whole Foods Market in a research note to investors on Thursday, July 26th. They now have a $105.00 price target on the stock, up previously from $100.00. Finally, analysts at Cantor Fitzgerald raised their price target on shares of Whole Foods Market from $104.00 to $106.00 in a research note to investors on Thursday, July 26th. They now have a buy rating on the stock.


Whole Foods Market has found its niche with consumers and is positioned in the perfect business to continue to thrive. As previously mentioned, its stores are located in urban areas and appeal to an increasingly large health-conscious crowd. Unfortunately not all Americans, or people in general, take an importance in their health (or can afford to) but the amount that do is on the rise. Just over one quarter of Americans is obese and efforts such as the First Lady have to inform the public in order to promote health will likely continue in order to combat obesity and unhealthiness.

These campaigns bode well for Whole Foods. Similarly to what has happened in terms of declining cigarette use partially as a result of campaigns to educate about the dangers of smoking, information about the unhealthiness of fast food, chips, etc. will lead to health food becoming a necessity. Therefore, unlike many other trends, healthy and natural food is going to be around for a long time and Whole Foods is here to capitalize on it.

Therefore, based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the WFM Jan 2013 100.000 call (WFM130119C00100000) at or under $5.50, good for the day. Place a protective stop limit at $1.80 and a pre-determined sell at $11.00.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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