Amazon's Whole Foods Buyout Creates Big Gains for Contrarian Traders in 2017

AMZN officially took over Whole Foods in August

Jan 10, 2018 at 11:48 AM
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The U.S. stock market closed out last year with impressive gains -- a trend that was echoed in our Top Stocks for 2017. On the list of 10 names we recommended was Whole Foods Market, Inc. (WFM), which proceeded to rack up a 35.62% return after our bullish recommendation -- thanks largely to a high-profile takeover by Amazon (NASDAQ:AMZN). Here's a closer look at what put WFM on our radar, and how the long pick unfolded.

When we recommended Whole Foods stock back in December 2016, the organic grocery name was showing signs of improvement on both margin and revenue growth. The shares had spent most of the past 12 months basing following a steep selloff in 2015, and were trading at just 19 times forward earnings. We also pegged WFM as a potential takeover target, which could serve as a positive catalyst for the shares.

Plus, deflationary fears had gripped food stocks in months leading up to our bullish recommendation, though this fear was likely overblown. Evidence of this was seen in an early December earnings outlook from industry leader Kroger (KR), which despite the lackluster forecast, sent the shares higher on the day. This indicated that deflation-related negativity was priced into the sector -- which could create tailwinds on a possible unwind.

Whole Foods stock was also heavily shorted at the time of our recommendation, while analyst ratings signaled that low expectations were levied toward the grocer. In other words, WFM had the potential to rally on a short squeeze or a round of upgrades.

Following a tepid start to the new year, Whole Foods shot higher in mid-April after Jana Partners revealed a stake in the company. Speculation over a possible sale continued to ramp up over the next several months -- and was confirmed on June 16, when Amazon said it was buying Whole Foods for $13.7 billion in cash, or $42 per WFM share. The deal officially closed on Aug. 28, with our long WFM recommendation turning in a huge gain for subscribers following the pick.


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