Costs have also gotten more painful for Whole Foods stock. Even though revenue rose almost 11% from fiscal year 2014 to FY16, operating income fell from $934 million to $857 million, a nearly 300-basis-point drop in gross margins. Net income fell from $579 million to $507 million, with margins declining almost 200 bps.
The good news is that both operating and free cash flow have remained relatively unchanged, at about $1.1 billion and $800 million, respectively. However, the company raised a billion dollars in debt in early 2016, for the worst of all possible reasons: to repurchase shares. I hate this. I absolutely hate it.
Instead of figuring out how to grow the business and find traction, Whole Foods is buying WFM stock that is trading at 19.7x FY16 earnings while net income is stagnant or falling. WFM thus goes from a company with no long-term debt to one with a billion dollars in debt, paying 5% interest and stealing about 10% of profits to service debt.
That’s why I don’t think you should invest in Whole Foods stock. It’s no longer an investment with a clear, long-term vision provided by management.
So you trade it. If you look at the one-year chart, you’ll see WFM stock has been in a trading range between $28 and $35. I would say to buy it under $30 and flip it above $33 to be safe. For more aggressive traders, you could short it above $33 and cover under $30. In both cases, however, set a 5%-7% stop loss.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.