Whole Foods Market is Undervalued
By EidoSearch“Price is what you pay. Value is what you get” – Warren Buffet
Whole Foods Market (WFM) is undervalued.
Now at $38.70, it’s below $40 a share for the first time in well over 2 years and is down about 70% from its peak of $65 reached only a few earnings announcements ago in Q4 of last year. Its price is down 33% this year alone, which includes a 20% drop on May 7th, when the company announced a continued decline in same store sales and lowered guidance for the balance of the year.
Their latest guidance has had plenty of time to settle into the market, and everyone’s working off the same information to generate conclusions on their growth projections from here. The market is efficient and the price is fairly set, and therefore $38.70 is the fair value of WFM at current. So, on what basis are we identifying this stock as undervalued? It’s simply how investors have reacted to these similar environments historically. More specifically, when a Consumer Defensive stock has traded like this historically (chart below), investors have felt it was undervalued and bid it up over the next 6 months.
Most fundamental investors we speak with are looking to invest in companies that are undervalued (or overvalued for Hedge Funds), “that’s what we do”. Fund managers want to find undervalued situations, or stocks that are “mispriced”, based on their fundamental research. Part of the trick in making money from these situations is building a position before the stock gains or regains favor.
EidoSearch provides an early detection system for undervalued and overvalued stocks based on how investors have reacted to the perceived value of similar stocks historically. We provide targeted idea generation to help investors focus on the right companies to do fundamental work on and to maximize the profit of that work.
We also highlight the risk profile and the range of historical outcomes in these environments. This is not only valuable for idea generation for asset managers with varying tolerance for risk and time horizons, but it is also a tremendous tool for portfolio monitoring as an early warning on holdings that may be entering overbought or oversold territory.
What’s the basis for Whole Foods being undervalued? We found 54 similar historical instances of the current price trend for Whole Foods in Consumer Defensive stocks, and almost 80% of the time the stock is up in the next 6 months and the average return is 16.8%.
The chart below shows the 6 month forward projection of 16.8%. One Standard Deviation down from the mean projected return is at $34, leaving us with 85% probability the stock will be above $34 a share in 6 months.
Replicating the Market Call in EidoSearch (Clients Only)
- Go to New Search tab, select Equities, type in WFM and hit Enter
- Select the 6 month tab at the top of the chart, and then hit Search at the bottom of the chart
- The projection will contain historical comps, timelines and the underlying analytics supporting the projection