Down, but Not Out?

 | Apr 02, 2013 | 10:00 AM EDT
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Whole Foods (WFM) is down 7.2% year-to-date vs. a 10% increase for the S&P 500. You have to go back to 2009 to find a time when Whole Foods underperformed the S&P. With lowered expectations, is now the time to acquire the shares while nobody is looking?

 It's been an ugly six months for the food retailer. When Whole Foods reported its fiscal 2012 fourth-quarter results, the company broke its two-year winning streak. Although Whole Foods beat the analyst estimate by a penny, forward guidance seemed uncertain. Investors were somewhat disappointed by the lack of perfection in the quarter and the stock drifted lower into the new year.

 By the time 2013 rolled around, however, investors had forgotten the quarter and the stock began its march upward.Then, in February, the company told investors to expect same store growth of between 6.6% and 8.0% vs. previous expectations of 6.5% to 8.5%. Although a slightly narrower range, investors didn't take the news well. Burned two quarters in a row, the stock sold off dramatically and has been left for dead since. Last night on  "Mad Money," Jim Cramer said he would rather buy Safeway (SWY) than Whole Foods.

It appears the last six months have been unusual. First, Hurricane Sandy interrupted business. Second, Whole Foods acquired six former Johnnie's Foodmaster locations. Johnnie's was a family-owned grocery chain located around Boston. It's unclear whether Charlestown Townies will welcome the new, much more expensive Whole Foods to the area. (Having lived in Charlestown for a year, I doubt it! The residents don't take kindly to strangers.) Also, the Charlestown location isn't far from the store by Massachusetts General Hospital, so I have to wonder how long that store will stay open. Because the Johnnie's acquisition, however, Whole Foods will face higher expenses for a few months while it renovates the six stores.

For those with an investment horizon longer than a year, I think the downside risk is only 5 points. It's possible the stock will trade over $100 within a year. I think Whole Foods' problems are mostly centered on poor investor sentiment, rather than some fundamental earnings problem.  I think the stock is down, but not out.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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