Why the Whole Foods Stock Rally May Have Legs

Shares of Whole Foods have been heating up since the Jana Partners news

Apr 12, 2017 at 2:46 PM
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Whole Foods stock has been one of the highest profile names in the past 48 hours. The buzz surrounding WFM shares stems from reports that activist investor Jana Partners could be pushing the organic grocer toward a possible sale. From the looks of it, short sellers could be getting punished by the sizzling shares.

Week-to-date, WFM stock has jumped 10.4% to trade at $34.32 -- including today's 2.3% gain. This could be putting short sellers on the defensive, based on a study run by Schaeffer's Senior Quantitative Analyst Rocky White. Most obviously, a lofty 12.4% of Whole Foods' float is sold short, representing almost two-weeks' worth of pent-up buying power, at average daily volumes.

But there's more, as White points out. Jan. 1 marked an annual low in WFM short interest, and since bottoming, these bearish bets have surged 42%. Plus, he estimates that the average price at which the shorts entered was $29.90, based on an average build date of Feb. 6. Given the facts above, the average short seller is currently sitting on a deficit of nearly 15%, suggesting they're being pressured to cover as WFM stock extends its upside run.

That said, short sellers may have hedged their bearish positions via long calls. Call buying has been extremely popular in recent weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). WFM sports a 10-day call/put volume ratio of 4.11, in the top quartile of its annual range.

That trend is continuing today. More than 16,000 WFM call options are on the tape, or two times the usual intraday amount. Plus, buy-to-open activity is detected at the near-the-money August 34 call, suggesting expectations for even more upside over the next four months.

Whether or not the aforementioned short sellers cover, Whole Foods stock still has plenty of opportunity to run higher, from a contrarian perspective. After all, 14 of 17 analysts rate the shares a "hold" or worse, while the average 12-month price target is below the current perch, at $29.19. In other words, WFM stock could benefit from upgrades and/or price-target hikes. Just this morning, in fact, BMO bumped its price target to $28 from $23. 

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