Shares of Whole Foods Market, Inc. (WFM) just can’t seem to find traction. After rallying in December, the stock has lost more than 10% year-to-date and fallen back near its November lows. Even last week’s modest nascent rally was quickly snuffed out on Monday after WFM was hit with a downgrade by BMO Capital Markets.
The result of this price action is that Whole Foods stock is again sitting at a level that has acted as support in the recent past, raising the question of whether WFM is forming a base or setting up for another breakdown.
Two factors offer clues indicating that more weakness could lie ahead.
First, Whole Foods’ fundamentals aren’t yet in a place that would form the basis for a turnaround. The increasing commoditization of natural foods means WFM either has to cut prices to prevent a further erosion of market share, or maintain its pricing and suffer a continued downturn in sales. As long as these trends remain in place, it’s unlikely the stock can build on its already premium multiple versus its industry peers.
Second, WFM stock also looked to be building a base in the May-July period. In that instance, it ultimately broke support following its weak earnings report for the fiscal third quarter. The company reports again on Feb. 10, with earnings coming after the bell.
This indicates an above-average potential for another breakdown in the coming weeks, meaning that the risks continue to outweigh the potential rewards. Avoid the temptation to go long in WFM for now, and be ready to take advantage of further downside if the stock breaks its support.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.