Why I'm Bullish on Whole Foods

As markets have rallied sharply over the past three weeks, we are seeing interesting chart patterns emerge. At the beginning of the month, the Dow became the most oversold it had been since 1938, leading me to predict a strong rally in my weekly newsletter EPIC Insights. Because of the recent strong rally, the oversold market has reversed.

To illustrate the point, I have a proprietary timing model that tracks investor sentiment. At every point in time, the model mandates that we have either a long or short position in each security. A normal market is 40-60% long with a corresponding short position. Anything over 80% is considered extreme. Three weeks ago, the timing model was 8% long and 92% short. This represented an extremely oversold condition that was ripe for a rally. As the rally has evolved, we now see the timing model 88% long and 12% short-an overbought condition. This move dictates that we must be cautious. Although overbought markets can remain that way and continue to push higher, not all rallies indicate a clear technical trend.

Consider Apple (AAPL). Since bottoming at $83.11 on March 9, the shares have rallied 29%. However, no clear technical pattern emerges. While bullish investors will highlight that the stock trades above an ascending 10-day moving average (MA), we have not seen the MA tested during the rise and therefore cannot determine if it offers support. Also, with the shares still below the late-September gap lower and 61.8% retracement level, headwinds remain. I might like AAPL's products and think they will do well in the future, yet the technical picture is muddled.

[click to enlarge charts]

Although AAPL is murky, Whole Foods Market (WFMI) is not. Correctly concerned about WFMI's niche as a high-end grocer, the market punished the shares by sending them from $35 in May 2008 to nearly $8 in November-a 6-month loss of 77%. The long decline (black line) capped any rally and held the shares below $10 into February. Since then, a high-volume day (black arrow) led to a gap higher, the creation of an uptrend (green line), and a bullish stock.

WFMI now trades above its 200-day moving average and is poised to run higher. The one cautious data point is that the stock is now overbought (green circle). However, we must always remember that extreme RSI readings can persist and allow the trend to continue. For example, WFMI was oversold in July and November of last year (red circles), but continued lower. Until I see the current trend violated, I am inclined to trade bullishly and recommend WFMI as this week's technical trade. Use a close below $15.50 as a stop loss.

Comments

[Ranjit Thomas:]

A company at 24x '09 EPS burning cash is a buy? Thank goodness for technical analysts! And don't forget the convertible they issued that dilutes the equity above $14.50.

Mar 30 08:22 AM

[greatguide:]

No point in being bullish on Whole Foods until that
nutcake fool CEO John Mackey, who runs it, is thrown
off the management team. Thats not going to happen
soon as practically the entire Board kisses his butt.

Mar 30 01:47 PM

[User 144500:]

Did you ever go into their stores and look at the inventory? So many goods that do not turnover along with high high prices. Meat and fish just lays in cases unsold as well as produce inventory. People for the most part visit to eat lunch. There are very few who buy more than a handful of groceries.

Mar 30 04:06 PM

[SwingTimer:]

Umm..sounds like a prescription for the "Buy High, then Sell Lower" approach. True, the market is down big time, as is this stock. I suppose one can ignore the fact that, short term, the market is overbought, where, as they say, "a falling tide lowers all boats". And, I suppose, one can also ignore the fact that significant "technical" resistance is waiting in the wings from the August/September $20 area. In addition, there is abosolutely no mention of fundamental developments that might support a "continuation". To the contrary, justification for further advance, it seems, is dependant on the fact that RSI has failed on past occasions. Humm...

Mar 30 04:30 PM

[jstratt:]

Just a few thoughts on WFMI

I like going to my local WFMI location 2 times a week
I like the low debt level they have
I like the way their profit results have held up so far

The 23 PE is a little rich for investing in WFMI
I see fewer people when I go in since turn of year
I find better values at Trader Joes
They have been opening additional locations that compete with their current locations.

I would consider investing at levels at least 30% below where they are now. Until that time I will just invest in WFMI by buying lunch there 2 times a week.

Mar 30 05:56 PM

[User 388238:]

I think Whole Foods will continue to be a destination site for gourmet shoppers who want alternatives to their local crappy super-markets....there's nothing "super" about them trying to sell the same ol same ol from the 1990's....most consumers regardless of income levels know the difference between frozen cod and fresh wild cod and the taste and Whole Foods has a number of competitive prices on a number of products. I don't buy organic foods, but I go there because they have interesting foods and if you shop intelligently you come away with nice items!!

Apr 03 11:23 AM

[borisb:]

The interesting thing about the Whole Foods Markets is they expense new stores and dont capitalize them. If WFMI did up keep on exisiting stores and didnt expand the free cash flow would be $600 milllion or about $4 a share before that dillution. So the pe metric might mislead. Focus on the $4 a share free cash flow situation instead of the 75 cent+ eps estimate for 2009 to justify a better price then the recent $18-$20+.

May 30 09:11 PM