Schaeffer's Trading Floor Blog

A Contrarian's Take on Whole Foods Market, Inc. (WFM)

WFM's big fall demonstrates basic principles of contrarian analysis

by 5/7/2014 1:15 PM
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Whole Foods Market, Inc. (NASDAQ:WFM) is crashing this afternoon, thanks to its latest turn in the earnings confessional last night. Specifically, in addition to posting weaker-than-expected fiscal second-quarter earnings, the organic grocer reported disappointing same-store sales growth. At last check, the shares were down more than 19% to trade at $38.68, after hitting a new two-year low of $37.31. However, a look at the options pits reveals that a pullback was not necessarily unexpected.

Specifically, on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), WFM's 50-day put/call volume ratio checks in at 1.16, with long puts outpacing long calls during the past 10 weeks. More significantly, the ratio sits just 2 percentage points from a 12-month acme, conveying that traders have scooped up puts over calls at a faster rate just 2% of the time in the last year.

By contrast, heading into today's session, sentiment on the Street was quite different. Specifically, Whole Foods had received 14 "strong buy" recommendations, compared to just six "holds" and not a single "sell" opinion. What's more, the consensus 12-month price target on the stock stood at a lofty $58.50. In the wake of last night's fundamental news, however, more than a dozen Wall Street bulls changed their tune on the equity. For example, this morning firms such as Cantor Fitzgerald, Jefferies, and Sterne Agee reduced their respective ratings and price targets.

For contrarians like us, today's losses make perfect sense. Even before the dramatic sell-off, WFM had been struggling. At its closing price of $47.95 yesterday, the shares were off 18% from their record high of $58.47, touched in late October. Also, the stock has underperformed the S&P 500 Index (SPX) by 16 percentage points during the last three months. In other words, the equity was already ripe for downgrades and price-target reductions, which finally came to fruition following Tuesday's negative news, exacerbating WFM's losses.

With today's move south, Whole Foods Market, Inc. (NASDAQ:WFM) has now lost roughly one-third of its value in 2014. Additionally, the shares are in danger of closing below their 50-month moving average for the first time since March 2010.

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