Activist hedge fund Jana Partners disclosed an 8% stake in natural food purveyor Whole Foods Market, Inc. (WFM) on Monday, making it the second-largest shareholder. They followed with a blistering attack on current management, criticizing the full scope of operations and their refusal to consider strategic alternatives in reaction to a steep slide in share prices since hitting an all-time high in October 2013.
Mainstream supermarkets have co-opted WFM's fresh and natural themes in recent years, adding aisles of organic, gluten-free and vegetarian offerings at lower prices than their upscale rival. The impact has been devastating to the company’s bottom line, triggering a long-term exodus of cost-conscious customers tired of paying premium prices for staples including bread, apples and peanut butter.
Algorithms and speculators hit the buy bids aggressively after the disclosure, expecting the fund to seek board seats and press management into a merger, sale or divestiture of assets that underpins much higher share valuation. The timing of the announcement was fortuitous, lifting the stock off a multi-year basing pattern into an uptrend that could reach much higher prices in coming months.
WFM Long-Term Chart (1992–2017)
The company came public in January 1992 at $1.53, after adjustment for four stock splits, and fell to an all-time low at 91-cents a few months later. It drew a broad trading range into 1996 and took off in a strong uptrend that peaked at $8.77 in March 1998, ahead of a rounded consolidation pattern that lasted through the first half of the Dot.com bear market, when it broke out once again.
The stock booked fabulous gains through the middle of the decade, topping out at $40 in 2006 and turning lower in a downtrend that accelerated during the 2008 economic collapse. It posted an 11-year low at $3.52 in November 2008 and bounced strongly, completing a round trip into the prior decade’s high in 2012. A breakout later that year caught fire, triggering a multi-wave uptrend that posted an all-time high at $65.59 in October 2013.
The subsequent decline unfolded in two broad waves that reached within a few points of the 50% retracement of the prior uptrend in the first quarter of 2016. Aggressive sellers then took profits and moved on to other short sale opportunities, yielding a rounded low energy base that’s still in play in the second quarter of 2017. This week’s rally into base resistance should complete the long-term reversal, setting the stage for an uptrend that recoups at least half of the stock’s multi-year losses.
WFM Short-Term Chart (2015-2017)
A Fibonacci grid stretched across the second selling wave organizes price action since 2015, with unfilled gaps crossing the .618 and .386 retracement levels. The lower gap has bounded the top of the basing pattern since late 2015, telling us a gap fill should also signal a base breakout. That level also marks a major breakdown through the 2014 low, which many technicians also believed would signal a lasting bottom.
On Balance Volume (OBV) held up relatively well into early 2015 and plunged in a major distribution event, with funds and retail players abandoning positions. The indicator drifted lower through most of 2016, finally turning higher after the presidential election but has made limited progress in April. While this illustrates the reluctance of sidelined players to open new positions, it also tells us the new uptrend should have plenty of running room.
The Bottom Line
Whole Foods rallied nearly 10% in Monday’s session after an activist hedge fund disclosed a large position and then criticized current management objectives. Their efforts to lift the stock’s price should carry weight in corporate decision-making in coming months because the current board room has clearly failed to staunch the multi-year bleeding through their own efforts.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>