A ratings bagging of Whole Foods Market, Inc. (WFM) is giving bulls a chance to shop for WFM stock at a discount.
Analysts at Cleveland Research downgraded shares of WFM stock to “underperform” on Monday. The cut was prompted by sales which “seemed to have slowed through 4QF15.”
The firm also noted a negative tone in the company’s supply channel and weak response by management to Whole Foods competition in cutting WFM to “underperform.”
Following the downgrade, shares of WFM stock are off by about 43% year-to-date.
The weak performance marks a substantial discount to the S&P 500, which has managed to scratch and claw its way back to a gain of about 1% in 2015.
In our view, this presents traders with a nice opportunity in WFM.
Shop Now for WFM Stock
As I’ve written before, WFM maintains a healthy balance sheet. Sure, competition is bound to cause some belt tightening, but there’s cash on hand, a dividend and a low enough payout ratio of 30% to suggest future growth above the current 1.6% given back to WFM shareholders.
Whole Foods also holds first movers and brand recognition advantages over most of its competition which should serve to support WFM.
Another reason to like WFM? Whole Foods isn’t just sitting around and waiting for market share to be taken from it. This year’s rollout of its new 365 by Whole Foods Market stores, which target urban millennials, shows management is in touch with crucial demographic trends.
Lastly and also supportive, while the big old price discount in WFM may make it look like a pharmaceutical or biotech, its own lesser pricing scandal from earlier this year is mostly behind it. And further, Cleveland Research’s bagging of Whole Foods has done bullish traders a favor. Let me explain.
Whole Foods Stock Chart
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The triple bottom in WFM allows us to redefine and tighten a previously discussed monthly chart Fibonacci support zone from a low of $27 using the 62% retracement, to $30, which is based on the current price pattern.
In using the WFM daily chart in conjunction with the monthly chart, the bullish triple bottom reduces the more volatile support zone by 60% from a range of $27-$34.50 to a narrower $30-$34.50.
The tightening of the support zone seems even more appropriate as WFM stock did manage to trade above September’s monthly inside doji candlestick.
Optimistically, I like the idea of positioning off a triple bottom, but turning a complete blind eye to the bearish reversal from $34.50 isn’t entirely smart either.
WFM Stock Bull Call Strategy
Given the tighter support area and earnings in Whole Foods set for Nov. 4 after the close, the WFM weekly Nov 6 $31.50/$33 bull call spread is attractive.
With WFM stock trading at $30.70, the weekly vertical is priced for 54 cents mid-market. Unlike owning long stock into an earnings report, this type spread allows for risk to be defined by the premium paid, without worrying about the use of a stop-loss strategy.
Another benefit of this spread is it lowers the trader’s breakeven. The vertical also reduces time decay, as well as volatility risks associated with owning an outright long call position.
Lastly, as this position is set near technical support (which we don’t wish to see break) and in front of a looming earnings event (which could prove volatile), there’s little reason to go further out on the options board where other unforeseen baggage or extraneous factors might impact the trade.
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.
