Investors are starting to roll in the dough in Whole Foods Market, Inc. (WFM) as a long-standing bear market is challenged with plenty of bullish ingredients in place. Let me explain.
The past month’s broader market relief rally has undoubtedly helped WFM stock register a modest gain of a little over 1% in 2016, while reversing and tacking on gains of about 20% from its early February low.
Unlike the market, though, WFM has other supportive ingredients for seeing its move continue to have bullish legs.
First, after two-plus years of declining shareholder value, WFM just finished testing price levels from 2011.
Combined with its price drop of 48% from its 2013 high, it’s fairly easy to appreciate how much lacking investor favor could return to the name and support a bullish turnaround in WFM.
Second and as discussed back at the beginning of February just prior to WFM stock’s earnings report, an overly cautious and almost bearish Wall Street consensus sets Whole Foods up for future bullish revisions.
It turns out Whole Foods delivered above Street forecasts on both its top and bottom lines while issuing an upbeat outlook as well.
And while Wall Street has not yet begun to wake up and smell the coffee — or maybe the fresh organics — a median hold rating by 30 firms and price target over 10% below current prices does offer the opportunity for upward revisions from a typically flat-footed analyst community.
Whole Foods Stock Daily Stock Chart
Click to Enlarge
In our more technical-oriented view, WFM looks ready to continue its move higher. The first area of resistance is likely in the $36 – $37 area, where the late July bearish gap and broadening pattern meet on the WFM stock chart.
Longer-term and following some price consolidation, a move to $39 – $40 and what amounts to a gap fill test looks quite possible, without having to be too optimistic — though, more so than today’s other Street view.
WFM Stock Long Bull Call Vertical
After reviewing the options board, the WFM April $35 / $36 bull call spread for up to 45 cents is attractive.
Premiums on the market are cheap right now, but given the Whole Foods’ tenuous status both on and off the chart, reducing risk with a WFM vertical makes sense compared with a straight WFM long call position.
This WFM bull call spread also maximizes the trader’s profit of 55 cents if WFM stock can simply get above the low end of our discussed initial resistance area of $36 – $37. Hence, this vertical looks to make more “cents” than other strategies with less risk per contract.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
