Earnings Trade – Whole Foods Markets Inc-WFMI

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Options players love movement, and Whole Foods Markets Inc. (WFMI) moves after earnings. Boy, does it move. The company is scheduled to report Tuesday, Feb. 16, after the close.

In three of the past four quarters, the stock has moved an average of 23% in just the first day following earnings. It’s easy to see when Whole Foods reports. Just look for huge gaps on the daily chart.

Speaking of the chart, WFMI’s is nothing to write home about. The stock has been flat for the past three months (ever since its last report), bouncing among its 20-day, 50-day, and 100-day moving averages, which are all also fairly flat. Quite frankly, it’s a boring chart that needs a kick in the pants from earnings.

WFMI Chart

So far, I haven’t said whether I like the stock or not. Well, I do, and here’s why. 

There’s no question that Whole Foods was hurt by an economy that did not favor high-end merchants. Being dubbed “Whole Paycheck” is hardly an endorsement for any company during a recession. 

But WFMI appears to have weathered the storm. The company has scaled back on its aggressive expansion plans to focus on making current stores more profitable. Yes, the product is expensive, but a recovering economy should bring more shoppers through its 300 or so doors (many never left).

What I like most about this stock is negative sentiment. High short interest paves the way for a short squeeze pushing the share price higher. And analysts have plenty of room for upgrades. Currently, just four of 19 rate the stock a “buy.” 

I also like the fact that once February options expire on Friday, Feb. 19, there’s little overhead call open interest to get in the stock’s way. What’s more, heavier put strikes beneath the current share price could lend some support.

To be sure, this is a risky play. The “whisper number” is calling for 31 cents compared to the analysts’ 26 cents. That’s a big difference. And the 100-day moving average is sitting overhead.

The rewards could be huge, though. If you decide to take the plunge on WFMI, cut your normal allocation in half. If the price moves as it has recently, you’ll be amply rewarded if you buy call options, even with a smaller stake.   

Tell us what you think here.  

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Article printed from InvestorPlace Media, https://investorplace.com/2010/02/earnings-trade-whole-foods-markets-inc-wfmi/.

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