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Random Walk theory would have you consider investments in companies that make products or offer services that you use every day, and a handful of years ago when Whole Foods Market (WFM) first opened a location in La Jolla I fell in love. I was not in love with the prices of course, but I could actually get a healthy meal from the prepared food section and pay only fractionally more than I would if I prepared it myself. That was an added value in my opinion.

However, every time I shopped at Whole Foods I cringed when it came time to check out. Almost everything they sell was 20-30% more than at other stores, and when your bill is $200 that can add up. The high-end consumer certainly doesn't care about this, but after a few visits the normal guy certainly does. I appreciate the prepared foods section, the company has tried to revamp their stores to make them a destination spot for meals, adding a service menu, beer, and television sets in designated seating areas too, and I think that is good, but that does not change the sticker shock many consumers have when they actually buy groceries.

Alternatively, Trader Joes, Jimbo's, and other health-conscious grocers start to look much more attractive to the normal consumer, and after the first couple of shocks, normal consumers second guess decisions to shop for everything at Whole Foods Markets. Personally, when I buy the same things at Trader Joes I am pleasantly surprised at checkout. In this case, Whole Food's prices actually make me like Trader Joes and the other less expensive but still predominantly organic and health-conscious retailers much more than i otherwise would.

In turn, I have found myself going to Whole Foods for prepared meals regularly, as I usually do, but when I leave the house to buy groceries, if I have a choice I will go elsewhere. Of course, if after a prepared meal I need to buy something for my wife I will pay the extra 20-30% and buy it at Whole Foods, but I avoid shopping for everything there now.

This is the same premise that made me like Whole Foods (as an investor) so much in 2008. My Random Walk tells me that more and more people are likely to feel like me, and the primary consumer at Whole Foods will continue to be predominately the high end consumer. That is a very limiting concept, a small market niche, but that migration also takes a while to occur.

Whole Foods carries with it a cache, but soon after that the money-factor plays a role, and therefore after the initial swagger has waned economies of scale (on a consumer level) start to play a significant role. My Random Walk experience at Whole Foods tells me to be cautious.

In addition, my longer-term macroeconomic work, The Investment Rate, tells me we are still in the third major down period in US History, and although recent stimulus has fabricated growth and induced the wealth effect, when the economy reverts back to its natural state as that is defined by the Investment Rate, the niche that Whole Foods seems to serve today will get even smaller.

Technically, the stock is poised to test the support level that is offered in our real time trading report for WFM a second time, without testing resistance in between. That is a red flag, and if support breaks this time our trading analysis tells us to avoid the stock completely.

Source: Whole Foods Market: Random Walk Theory