This commentary originally appeared on Real Money Pro at 8:20 a.m. ET on Thursday, July 30. Click here to learn about this dynamic market information service for active traders.
Whole Foods Markets (WFM) plunged more than 10% in premarket trading after the grocery chain came up short in reporting quarterly earnings after the bell yesterday and lowered expectations for the current three-month period.
The Street is no longer in love with this stock -- but I think that at its current price, Whole Foods is at a sweet spot for a long entry:
The 10%-plus drop in WFM's stock has brought shares down to a major support level near $36.20 (point A in the chart above). That's the bottom the stock reached after a dramatic post-earnings selloff last year.
So, I initiated a long position in that area last night in the after-hours market.
Now you might ask: "With the ongoing proliferation of natural and organic foods at supermarkets and neighborhood grocery stores, why would anyone want to own Whole Foods?"
Well, the company hopes to regain favor with next year's rollout of "365 by Whole Foods Market," a chain of smaller, lower-priced natural-food stores aimed at a younger demographic.
The new stores seem designed to go head-to-head with Trader Joe's, the popular, privately held natural-foods grocery chain. Trader Joe's operates smaller stores that boast an average-sales-per-square-foot level that's nearly twice what Whole Foods' shops ring up.
By making better use of space, smaller stores will allow Whole Foods to compete against Trader Joe's on price. That, in turn, should allow Whole Foods to shed its reputation as an overpriced grocery chain -- and perhaps eat Trader Joe's lunch in the process.
Whole Foods has garnered a reputation for selling high-quality foods, but its high-end prices have also earned the chain the nickname "Whole Paycheck."
That reputation was only intensified last month when the New York City Department of Consumer Affairs made widely publicized accusations that Whole Foods had mislabeled some products and overcharged consumers. The company admitted to making some mistakes, but the scandal remains fresh in consumers' minds.
Fortunately for Whole Foods, consumers have forgiven retailers for more-egregious offenses in the past. For instance, a December 2014 data breach at Target (TGT) put 70 million customers at risk and weighed on that stock for a time, but the effect proved temporary and shoppers soon returned.
The bottom line: While investor sentiment surrounding Whole Foods is very negative right now, I believe the company has an ace up its sleeve with its new small-store concept. While the initiative might take time to play out, I think Whole Foods has a great opportunity to repair its image and reinvent itself.