There’s a lot of buzz out there about Black Friday and Cyber Monday, and how you can trade what has been a pretty strong holiday shopping season so far. But there’s something we all need, regardless of the season, and that’s food. Sounds simple, I know, but there’s nothing simple about consumers choosing an upscale grocery shopping experience that nets them the high-quality organic and natural foods that are so popular right now. Now, when you talk high-end organic and natural food grocers, there’s really only one name that comes to mind, and that is Whole Foods Market (NYSE:WFM).
This company has been a darling of well-heeled food shoppers for years, and it’s also been a darling of Wall Street’s high-growth, high-momentum investing crowd, a crowd I find myself in most of the time.
Click to Enlarge How much momentum are we talking about here? Well, year to date WFM shares are up about 31%, but that outstanding metric doesn’t tell the whole story. From the beginning of the year until Oct. 5, the stock surged some 45%. Then the selling kicked in, and traders opted to bank profits.
The selling really ramped up in November, as a failure to raise 2013 outlook despite a strong fiscal fourth quarter earnings report sent more momentum players running for the exits. This news, combined with the post-election, and fiscal cliff sell-off knocked WFM back down below its 200-day moving average.
Since breaking below this technical level, the shares have seen a big bounce. Part of that is likely due to the return of buyers into the general market. The other part is the realization that companies serving a niche market that have proven to be outstanding in terms of earnings growth, will likely survive any year-end fiscal cliff profit taking.
I suspect that the momentum trade in WFM can continue, and that means traders can take advantage of the stock now while it trades below its 50-day moving average.
I recommend buying WFM shares under $95.82 (the current 50-day moving average). I suspect the shares could surge beyond the previous high of $101.19 in just a few weeks, and I suspect the stock could move well beyond the $110 level if fiscal first-quarter numbers are strong. You should hold the shares until at least early February, when the company releases its next earnings report (Feb. 6).
If, however, the shares give up momentum from here, then you will want to be protected. I suggest setting a stop-loss at approximately 8% below your buy price. If a momentum trade falls below that level, you have to admit that you got it wrong, and then rotate your capital into other stocks that give you a better chance of achieving a winning trade.
At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.