Tuesday, May 29, 2012

WFM: Organic goodness

Whole Foods Market Inc. (WFM), through a chain of 311 stores in the U.S., Canada and U.K., sells organic and natural foods.

I shop at my local branch of the Austin, Texas company and despite paying higher prices than I would at Safeway, I keep coming back for more. The veggies stay fresher, longer, and the meats taste much better than what I find elsewhere.

The company puts a premium on pleasant service and community outreach. It may be a big chain, but it's trying very hard to act local.

Despite the healthy goodness, Whole Foods is a grocery store, and food decisions are sensitive to the social mood. If I think times are getting tough, I'll be less likely to pay the premium prices Whole Foods commands for its organics and will find someplace cheaper to shop, chemicals or no.

WFM had the most bullish chart among 16 higher volume stocks rated as bull plays by analyst consensus.

The stock, like many, faltered in early May after peaking at $91.50 on May 4. After falling to $82.69 on May 21, it began recovering, rising from $83.35.

The price remains $3 below the May 4 high, which was also an all-time high, breaking for the first time past a pre-recession peak set in late 2005.

The momentum is decidedly to the upside. Each of the last six trading days has shown an intra-day rise, and four have closed above the prior day's close.

Whole Foods has return on equity of 13% with very low long-term debt, amounting to only 1% of equity.

Institutions own 84% of shares, which have not been bid up to extraordinary levels. It takes $1.48 in shares to control a dollar in sales.

The company has shown positive earnings and upside earnings surprises every quarter since the 3rd of 2009. Profits tend to drop off each 4th quarter, and the other quarters have tended toward plateaus, with each year's plateau higher than its predecessors.

WFM on average trades 1.7 million shares a day and supports a good selectoin of options with high open interest and narrow bid/ask spreads.

Implied volatility stands at 29%, about mid-way through the six-month range. Options traders are pricing in a 68.2% chance that the stock will close between $80.86 and $95.88 a month from now, for a maximum gain or loss of 8.5%.

Whole Foods next publishes earnings on July 30. The stock goes ex-dividend in early July for a quarterly payout yielding 0.63% annualized.

Decision for my account: There's nothing I don't like about WFM. Good chart, good financials, not to mention good food. The options are such that it's possible to implement a wide variety of strategies in playing WFM. The cautious trader will wait for a break above the $91.50 peak, but I would not do that for my own account.

However, I won't be trading WFM at this point. My trading funds are fully committed. I will consider it for my next round of diagonal spreads in mid-June.

I screened the stocks using a tourney bracket with a six-month daily chart and a five-year weekly chart. See my essay "10,000 Charts" for a discussion of my screening methods.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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