Why Whole Foods Market, Inc. Shares May Stay at $40

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Whole Foods Market, (NASDAQ: WFM  ) plummeted 20% today after the natural-foods grocer posted disappointing Q2 results and received a buy-to-hold downgrade from Deutsche Bank.

So what: Along with the downgrade, analyst Karen Short lowered her price target to $40 (from $60), representing about 17% worth of downside to yesterday's close. So while contrarian traders might be attracted to Whole Foods' big pullback today, Short's call could reflect a sense on Wall Street that its operating headwinds will leave the stock range-bound.

Now what: According to Deutsche, Whole Foods' risk/reward trade-off is rather balanced at this point. "Natural retailers account for 4% of total supermarket units today -- an indication that there is ample room for all of the natural players to take share from conventionals. For now, however, these formats are growing at ~15% -- well above conversion rates at the consumer level," said Short. "This disconnect is leading to excess capacity in the near term -- or 'temporary saturation', and until this situation shakes out through consolidation, store closures and market exits, all participants in the space may feel some pain." With Whole Foods shares now off about 40% from their 52-week highs, however, those short-term concerns might be providing patient Fools with a solid long-term entry point. 

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Comments from our Foolish Readers

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  • Report this Comment On May 07, 2014, at 1:10 PM, hardwareace wrote:

    They miss earnings by 3 cents and the stock goes down over $9 - the stock market is amazing - just not very rational.

  • Report this Comment On May 07, 2014, at 2:58 PM, kalevine wrote:

    the price was only justified by continued rapid growth. That is, there was a premium on the shares that the market no longer feels is worth paying. It sucks, especially when you are caught in the downdraft

  • Report this Comment On May 07, 2014, at 3:51 PM, tuckerrocks wrote:

    Fairly new Fool. I have been a believer in WFM for many reasons and bought back in on the split. We shop there for much of our grocery needs. Also, I like the new smaller footprint store they are rolling out. That said, the hammering this stock has taken really disrupts the my longterm strategy. Being down over 20% in the last month, new competition from organic grocers (i.e. Sprouts, etc), main stream grocers and Costco; I am unsure of what to do.

    Any suggestions out there.



  • Report this Comment On May 07, 2014, at 4:25 PM, leadmoto wrote:

    To expensive to shop there. I'm afraid WFM is going the way of Fresh & Easy.

  • Report this Comment On May 07, 2014, at 6:18 PM, Glidemaster wrote:

    WFM was one MF recommendation that has turned seriously sour for me. I reduced my cost basis by opening with a buy/write initially and the call option will fade in about 1 wk. I think now that it might be a bit undervalued as it still has good fundamentals and no debt. Probably will further lower my cost basis by buying some more and holding.

  • Report this Comment On May 08, 2014, at 10:55 AM, RxPro wrote:

    I really like this new price for a long term entry. I've been following WFM Before they jumped in recent months would have been another good entry point, around the same price just ~$80. They had a really good run and I could easily see them hitting $50 again in 2015 but for now WFM will be in the 40s.

    Personally, my wife loves WFM although I find their selection and some prices a little underwhelming. They make fun grocery stores and you don't feel odd just going there for a sit down meal either although their hot-bar food prices are outrageous.

    I don't own WFM, but they are on my watchlist and have been for a while. I always felt the price was too high to enter recently, but this changes that.

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Brian Pacampara

I take a look at big 10% moves, as well as stock-shaking analyst calls, on a daily basis for The Fool. While I don't believe in active trading, closely monitoring Mr. Market's mood swings can help identify long-term opportunities.

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9/3/2015 3:59 PM
WFM $32.36 Up +0.09 +0.26%
Whole Foods Market CAPS Rating: ****