Whole Foods Market Is About to CrashWFM) has been a range-bound and volatile stock for the past one year. Although I was bullish on the stock a few months ago, I think Whole Foods is a short going into the earnings. Investors can benefit from the range bound nature of Whole Foods by shorting the stock when it is on the downtrend.
Whole Foods is scheduled to report earnings next week and analysts are expecting the company’s EPS to take a hit on small revenue growth. For the quarter, analysts are expecting Whole Foods to report EPS of $0.37, $0.07 lower than last year.
Given the weak growth estimates, Whole Foods is trading at a premium valuation. As of writing, Whole Foods was trading at 22x trailing earnings. A stock trading at such a high valuation should be posting at least 15%+ revenue growth, which is the primary reason why I think Whole Foods is overvalued.
In addition to the overvaluation, the growing competition is also a concern for the company going forward. Competitors like Sprouts Farmers Market and The Fresh Market have won market share from Whole Foods due to attractive pricing.
Although Whole Foods has managed to be successful despite being expensive till now, this trend will likely change in the near future, making the stock a great short at current levels. The layoffs last year point to the fact that the competitors are taking a toll on Whole Foods.
Granted the company is expanding into several places, I still think it will miss the earnings due to the growing competition and the layoffs. Even if Whole Foods manages to surpass the consensus on earnings and revenue, the upside will be pretty limited. As mentioned above, the stock is clearly overvalued and the likelihood of any positive earnings surprise being baked into the current share price is very high. The risk/reward ratio at these levels is pretty unfavorable for longs.
Due to the reasons mentioned above, I think Whole Foods market is overvalued and destined to head lower. The increasing competition has taken a toll on the company, which will become evident in the next earnings report.
Since I expect Whole Foods to miss earnings by a good margin, I would recommend investors to either short the stock or buy put options ahead of the report.
Disclosure: No position
Published on Jul 22, 2016By Ayush Singh