Gold Upside Limited, Buy Whole Foods, Weekly Market Outlook

Includes: DIA, GLD, QQQ, SPY, WFM
by: David Ristau


Well, well, well…the stock market is going to be looking at a very tough week potentially as Washington DC looks to hold the market hostage yet again, like they did in December of 2012. Both sides of the aisle are not interested yet in making concessions, and the government does not look likely to hit the October 1 deadline for temporary shutdown but the market has until mid-October before a massive government shutdown will hit the market. In the midst of that, we also have a key economic data week with the ISM Index, Auto / Truck Sales, jobs data (Unemployment Rate and NFP), and more. Overall, fear is about to hit the market to start the week, but we have been through this before.

Chart Overview

Here is the chart we are seeing for the S&P 500 (NYSEARCA:SPY) right now. There is good support at the 1650-1660 area on the S&P. That would be the level to watch if things really sour this week. If something miraculously does happen in the market, we should watch 1725 for a breakout level. There is also good support at 1625. The Dow Jones (NYSEARCA:DIA) and Nasdaq (NASDAQ:QQQ) look similar to these levels.

Economic Data


Data Report

Market Expectations

Previous Report

September 30

Chicago PMI - September



October 1

ISM Index - September



October 1

Construction Spending - August



October 1

Auto/Truck Sales - September



October 2

ADP Employment Change - September



October 3

Initial Claims - 09/28



October 3

Factory Orders - August



October 3

ISM Services - September



October 4

Nonfarm Payrolls - September



October 4

Unemployment Rate - September



Economic data is jam-packed this week, but we may not get all these reports if the government shuts down on Tuesday. Things are not looking good for that, so we may get less data overall throughout this week. If we get it all, though, it's going to be a lot to watch. We have everything from different sectors of the market. We start the week on Tuesday with the ISM Index, Construction Spending, and Auto / Truck Sales. We get interesting information on industrial markets, housing, and automotive. This will be a big day. We start jobs on Wednesday with ADP Employment, followed by Initial Claims on Thursday. From there, we get the Nonfarm Payrolls and Unemployment Rate on Friday. Employment is not expected to see much improvement over August, which may be the key to a rebound in the market, as it will suggest more free money from the Fed.

Foreign Markets

Outside of the USA, Europe and Asia will likely take a backseat with so much happening at home this week. Some highlights to watch, though, for foreign commodities and equities is the HSBC Flash Manufacturing PMI on Monday, which is expected to show more growth expansion for China. Tuesday's Chinese Manufacturing PMI will follow that number. We also get unemployment numbers for Germany, Italy, and the Eurozone. Wednesday will bring us the ECB rate decision, and we finish the week with the bank of Japan monetary policy statement on Friday as well as some targets for 2014.



Key Company

September 30


October 1

Walgreens (WAG)

October 2

Monsanto (NYSE:MON)

October 3

Constellation Brands (NYSE:STZ)

Earnings are very light this week, and they will have no impact on the market. The big earnings report season starts next week.

Fed Outlook

The Fed should take a slight back seat to the government, but the jobs number at the end of the week is crucial to the taper or not taper conversation. Given the shutdown potential and lack of solid economic data, we do not see any reason to taper right now, and most analysts do not expect anything until December at the earliest. The government steals the show this week, though.


It does not appear that the government has any interest in getting anything done before Tuesday, and the market will likely reflect that to start the week. From there, things should be very headline driven with movement towards a resolution giving market upside, while issues will lead to more downside. We have a lot of data to digest, but how much of that we get to see this week will depend on the government shutdown looming.


Ticker: Whole Foods Market (NASDAQ:WFM)

Whole Foods is up nearly 30% YTD and close to 25% over the year. Valuations are high when looking at the company's price/earnings due to a lower margin business. The question moving forward, though, is can share prices move higher and are the company's current valuations a major concern for the company. The two major catalysts for the company moving forward are store growth potential, as well as macro-growth of organic sales in the USA. Yet, while the company has some potential growth from a higher volume of sales as the company introduces more value opportunities, they also could potentially hurt margins.

First, the company has exceptional store growth potential. Right now, the company believes they have potential for 1,000 stores in the USA. The company, currently, has about 350 stores open in the USA. They are opening around 30 new stores per year, which gives them a lot of potential moving forward. The company is starting to move into some less ideal areas that they have not been in before, such as Detroit. The company, though, is seeing strong results already in this new market. The company's co-CEO Walter Robb said that the "store is exceeding our wildest expectations." If the company can do well in markets that have slightly less than ideal make ups, it can make good on their 1000 store goal. At 30 stores per year (with 94 already on lease to be opened), the company has strong growth potential.

Further, their stores can sell more per store due to the organic food revolution that continues to grow. According to Brian Agnew, U.S. organic food is only 5% of total U.S. food sales, and there is a lot of room for growth. Here is a quote from the USDA supporting that claim:

Organic food sales in the United States have increased from approximately $11 billion in 2004 to an estimated $27 billion in 2012, according to the Nutrition Business Journal. Organic food products are still gaining ground in conventional supermarkets as well as natural foods markets, and organic sales accounted for more than 3.5 percent of total U.S. food sales in 2012. Markets for organic vegetables, fruits, and herbs have been developing for decades in the United States, and fresh produce is still the top-selling organic category in retail sales. Although the annual growth rate for organic food sales fell from the double-digit range in 2008 as the U.S. economy slowed, its 7.4-percent growth rate in 2012 was more than double the annual growth rate forecast for all food sales in 2012.

Organic food growth and new stores are the backbone of the WFM story, but what if the company ends up making less per check. One of the big initiatives for the company, and likely one that will help them to reach their 1,000 store goal, is more value opportunities - cheaper products. Robb noted:

In Detroit, we implemented a new value strategy in our perishable areas that has been very well received. We are opening a similar store in New Orleans later this year and we think that there's opportunities to duplicate elements of this value strategy for perishables in select markets across the country.

The problem, though, is that margins decrease with cheaper products, which has been one of the issues for most other grocers. The premium valuation on WFM makes the stock less attractive, and if their margins decrease as well, it makes some of this potential growth less exciting.

What we decided to do was to price out for the company on growth of revenue at CAGR of 10-12% per year, but we expect margins to decrease around 100 basis points due to the issue above. With those estimates in mind, here is our pricing:

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for WFM: 6.2%






PV Factor of WACC






PV of Available Cash Flow






Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for WFM: 2.2%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


In the model, we see WFM worth $75, showing 30% potential in the company over the next twelve months. This stock still has lots of room to run!

Ticker: Proshares Gold (NYSEARCA:GLD)

Right now, its important for individuals to look towards selling some stocks as well as arming themselves with potential shorting opportunities if the market does not do very well. Another potential option is a bear call spread, where one can get paid to write premium in option spreads id the stock does not increase in price. One area that could see potential downside is gold. The problem for gold right now is that an eventual taper is going to happen. Gold has been built on cheap money entering the market, weakening the currency, and making gold a more valuable asset. Yet, gold prices will eventually come down as taper is inevitable.

Bank of America / Merrill Lynch believe that the normalization of U.S. monetary policy is a key reason to expect a decline in gold, and we agree. As monetary policy normalizes and the economy recovers through 2015, gold loses its weak dollar growth potential as well as safe have assets.

Here is the reasoning from BOA:

"Gold prices have stabilized and they could remain supported as the U.S. reaches the debt ceiling. However, we believe the focus of investors remains firmly on a gradual normalization of U.S. monetary policy. Hence, our base case anticipates sustained headwinds to gold prices," says Daniel Lian and other analysts in a note.

"Given the unfolding rebound of global economic growth, we believe the more cyclical precious metals, including silver, are likely to outperform gold."

Silver is a better place because it has more uses in the economy and has more demand for that reason. Gold prices weaken when the dollar increases against foreign commodities because investors seeking alternative investments decrease. As that demand drops, the price goes down. The short-term issues with the government and Fed taper will lead to some potential for gold, but these short-term rises are not long-term macro trends. Monetary policy will stabilize for the most part over the next 12-24 months, and that puts a ceiling on gold prices.

Therefore, we like a longer-term bear call spread on gold prices due to not believing that a straight shot down is in order, but potential upside is simply limited. A great way to play this trend is with a January 2015 145/150 bear call spread worth potentially 30% in returns currently.

Use this week's potential soar in gold prices to be a short-term rise to write some longer term bearish spreads on gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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