Is Whole Foods Market at Risk of a Post-Earnings Sell-Off?

by Joseph Hargett | May 2, 2012 8:29 am

WholeFoods Is Whole Foods Market at Risk of a Post Earnings Sell Off?Known for shelves stocked with natural and organic foods, Whole Foods Market (NASDAQ:WFM[1]) will step onto the earnings stage after the close of trading this afternoon. Analysts are expecting second-quarter earnings to rise 16% to 59 cents per share, with revenue adding 13% to $2.67 billion. Historically, Whole Foods is on solid footing, beating Wall Street’s estimates in each of the prior four reporting periods by an average of about 4.5%.

That said, many analysts may have set their targets higher, as the whisper number for WFM’s earnings arrives at 61 cents per share.

Further evidence of high expectations rests with the brokerage community. Specifically, 14 of 24 analysts following WFM rate the shares a buy or better, compared to 10 holds and no sell ratings. However, some of these brokerage bulls might be reviewing their ratings, as WFM is trading a mere 5.8% below the average 12-month price target of $89.

Turning our attention to the options pits, calls have grown extremely popular ahead of Whole Foods’ quarterly report. In fact, Tuesday’s put/call volume ratio of 0.47 reveals that call volume more than doubled put volume. In the May series of options, WFM call open interest totals 19,847 contracts, with options traders focusing heavily on the out-of-the-money May 85, 87.50 and 90 strikes.

Technically speaking, WFM has gained more than 20% since the beginning of the year. That said, while the stock enjoyed a steady uptrend through mid-March, the shares have since stagnated below resistance near $86. Currently, WFM is consolidating into its rising 50-day moving average — a support level the shares must hold to resume their uptrend.

With WFM attracting a wealth of bullish attention despite stalled price action, the stock faces a potentially negative post-earnings reaction if the company cannot live up to expectations. As such, traders might want to consider a May 85/80 bear put spread.

This trade was last offered at $2.05, or $205 per pair of contracts, at the close of trading on Tuesday. Breakeven for this position lies at $82.95, while a maximum profit of $2.95, or $295 per pair of contracts, would be achieved if WFM closes at or below $80 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Endnotes:
  1. WFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFM

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