(B)(N) WFM Whole Foods Market Incorporated

Drama. Mr. Cramer, and many, many, other investment professionals think that there should be – must be – some relationship between a company’s earnings in the current quarter or year, and forecasts of the same, for better or worse, and the company’s stock price (The Street, May 22, 2013, Cramer: They Were Wrong About Whole Foods).

And they are dismayed and surprised when that isn’t true – that it doesn’t work out, doesn’t make sense – and they end up looking for some kind of strangeness in the market that might make it true if things were “correct” (please see our earlier Post, The New Wave Markets, May 2013).

Allers Familj-Journal 1922

Gentlemen, that has never been true, but, we must admit, it might defy common sense in the same way that the flat earth beguiled the pre-Columbians.

But “earnings” are not cash flow nor debt nor debt service, and there are no “holes” in the stock price that need to be “filled” in order to “round things out” and avoid “gaps”, we guess (ibid, The Street).

Please see our Post, Earnings Don’t Matter, April 2013, for a way to scientifically test that earnings don’t matter, and, by the way, two of the other Great Lynchpins of Investment Lore:

1. Earnings don’t matter;
2. Buy Low and Sell High doesn’t work;
3. The Capital Assets Pricing Model (CAPM) doesn’t work; but
4. The Risk Price (SF) does work.

The Risk Price (SF), of course, is our best estimate of the “price of risk” which is determined by the demonstrated “societal standards of risk aversion and bargaining practice” (please see the references below) and it’s disconcerting that investment professionals don’t share the same sense of things that, on balance, implement stock prices, and that they are, therefore, cast in a logical space that is more familiar to religious professionals.

We, on the other hand, need to take defensive actions to protect ourselves against unexpected or difficult to rationalize leaps of faith, because a lot of buying and selling of stocks, for whatever reason, can certainly affect the ambient stock prices for reasons that we can’t explain.

Whole Foods has been in the Perpetual Bond™ since $20 more than three years ago and is still in the Perpetual Bond™ now at $100 because, and only because, and for no other reason, than that the ambient stock prices as summarized by the Red Line Stock Price (SP) appears to be above the Black Line Risk Price (SF). Please see Exhibit 1 below.

But, to stay there and not be sold out by a stop/loss or call against our long position, we have to exercise some vigilance. The indicated downside in the stock price due to the demonstrated volatility of the stock price is as much as minus ($7.50) per quarter, and we should not be surprised at any stock price between the current $100 and $93 or $108.

The current dividend yield of $0.20 per share per quarter is miniscule at 0.75% for a payout of $150 million per  year to the shareholders on gross revenues of $12 billion and an operating profit of $4 billion and operating income (after selling, general and admin expenses) of $1 billion, which is not bad for a grocery store.

We can stay in the store, so to speak, by buying the July put at $100 for $2.25 per share today, and partially offsetting the cost of that by selling or shorting the July call at $110 for $1.20 (or $105 for $2.80, and make a profit on the collar, but it seems a bit narrow), so that for a cost of holding the stock at $100 and the collar at $1.05 ($2.25 less $1.20), we’re good to go between $100 and $110 for the several months; we hope, but if not, we might need to roll the collar up and forward on this “high maintenance” stock. But, we certainly know why we’re doing it.

Exhibit 1: (B)(N) WFM Whole Foods Market Incorporated – Risk Price Chart

(B)(N) WFM Whole Foods Market Incorporated

Whole Foods Market Incorporated owns and operates the chain of natural and organic foods supermarkets. Its products include seafood, grocery, meat and poultry, bakery, prepared foods and catering, specialty, coffee and tea and educational products.

(Please Click on the Chart to make it larger if required.)

From the Company: Whole Foods Market Incorporated owns and operates a chain of natural and organic foods supermarkets. The company offers produce, grocery, meat and poultry, seafood, bakery, prepared foods and catering, coffee and tea, nutritional supplements, and vitamins. The company also provides specialty products, such as beer, wine, and cheese; body care products; educational products, such as books; floral items; and pet and household products. As of May 7, 2013, it operated 349 stores in the United States, Canada, and the United Kingdom. The company was founded in 1978 and is headquartered in Austin, Texas.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.