WFMI Smack-Down

Shares Get Killed, Opening a Possible Opportunity

Dear Bottarelli Research Member,

Have you seen shares of Whole Foods Market (WFMI — NASDAQ) today? Holy mackerel! The stock is getting absolutely hammered after they said their days of breakaway sales growth are over (make sure to notice today’s price tick, which is the little yellow blip at the very bottom of this chart)

As you may or may not know, Whole Foods was a company I made tremendous profits on back in 2004 as they were just establishing themselves as the premier organic grocery store in the country. But today, we’re seeing one of the largest “downside gift gaps” I’ve seen in quite a while due to Whole Foods warning that 2007 will be a “transition year” which promoted them to lower their sales growth from 15% to 20% down to a new range between 13% and 17%. The reason for the downward revision, according to Whole Foods, is that maintaining the level of sales growth investors had become accustomed to is now mathematically impossible. And I believe them.

In my early research of Whole Foods, I came to realize that their Chief Executive, John Mackey, is truly one of the “good guys” in the corporate world. He’s brutally honest about WFMI’s business, yet his vision to make grocery shopping (which is typically a mundane task) into an exciting event that you actually look forward to is something I consider brilliant. When I walk into a Whole Foods store, I’m inspired to cook and experiment with new foods. This tells me that Mackey’s vision is a success. What’s more, Mr. Mackey agreed to work for $1 in 2007 and forego stock options. I don’t know another CEO in America willing to agree to a deal like that!

The thing I’m seeing in WFMI today is that investors are over-reacting to the news. Instead of growing at a 20% pace, they’ll grow at a 15% pace. Is that 5% growth worth trimming 20% off the stock’s total value? Apparently the answer is “yes,” but I’m willing to bet that value investors will come in and scoop shares of WFMI if they get too low. Now I admit, WFMI could experience even more selling pressure in the coming weeks, but if we take a longer-term approach and add some January calls, I think we could be positioned to ride a great turnaround move over the next 2-3 months. In fact, the WFMI January 45 Calls (FMQ AI) have lost 71% of their value today, dropping from $17.40 down to $5.00. Since these calls are now trading “at the money” I think adding them as a longer-dated turnaround play could eventually pay off if we adopt a patient approach. If you agree that today’s sell-off in WFMI is too much and you’d like to play a 3-month recovery based on today’s tremendous “downside gift gap” then here’s your play:

PLAY: Buy the WFMI January 45 Calls (FMQ AI) at or under $5.30, good for the day. Place a protective stop loss at $$3.90.

In other news, our quick play on the RIG December 70 Calls (RIG LN) continues to shoot higher. If you were not able to sell your calls yesterday, you’re getting an even better exit price today. These calls have traded as high as $6.60 today, good for a nice 40.42% jump off yesterday’s levels. If you’re still holding, take your profits now!

Plus, I’d like to maintain all three of our remaining positions: CAT January 65 Calls (CAT AM), LVS November 75 Puts (LVS WO), and DIA November 120 Puts (DAW WP).You know the strategy behind each play, as CAT is a longer-dated turnaround position, LVS is a quick downside move, and DIA is a protective position against a market down-turn. If any trading is necessary, you’ll be the first to know. Until then…

Lock and load!

Sincerely,