Why Whole Foods Is Flying High Again

by Samuel Taube, Managing Editor, Investment U
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These days, Whole Foods (Nasdaq: WFM) is the butt of many jokes. Its “granola” aesthetic has been extensively parodied in South Park and The Simpsons. But hey, publicity is publicity. The organic food-focused grocer has a well-known brand.

It’s had its share of setbacks recently, including a 2015 sell-off that erased almost half its market value. Since then, the organics pioneer has traded at a discount to many of its competitors.

And as we found out last week, the smart money is starting to take notice.

Whole Foods stock shot up earlier this month after reports surfaced that Amazon (Nasdaq: AMZN) CEO Jeff Bezos considered buying the chain last year.

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Bezos ultimately didn’t follow through. But he’s not the only high-profile investor with a Whole Foods acquisition in mind. JANA Partners, an activist hedge fund, recently upped its stake in the grocer to 9%. Its ultimate goal is to sell the chain to a bigger player, like Amazon or Kroger (NYSE: KR).

What would a Whole Foods buyout look like? Is it too late to turn a profit on Whole Foods stock? We’ll be answering these questions below.

Is Whole Foods Going Wholesale?

Whole Foods basically invented the organic grocer business model. It opened its first store back in 1980, long before the organic food trend went mainstream.

But in the decades since then, lots of other businesses have jumped on the bandwagon. Copycats like Sprouts Farmers Market (Nasdaq: SFM) have cut into Whole Foods’ margins. So have bigger, more established players like Wal-Mart (NYSE: WMT), which now offers its own organic options at much lower prices.

Whole Foods’ declining competitiveness came to a head in 2015, when a severe earnings miss sent the stock on a year-long downward spiral.

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When the dust cleared, shares were cheap, and management had lost quite a bit of credibility. As often happens in these situations, activist investors piled into Whole Foods in 2016. This is when Jeff Bezos allegedly mused about buying the chain.

Ultimately, the Amazon founder decided against it for a pretty obvious reason. Amazon has been pouring resources into developing its own grocery business. But that doesn’t mean another buyer won’t come out of the woodwork.

How to Profit From the Whole Foods Buyout Spike

When a company is a potential takeover target, shares trade at a premium to their natural market price, but below the proposed buyout price. We discussed this in our article about the pending Bayer-Monsanto merger. The premium measures the risk that the deal won’t go through (often a devastating event for the target company’s stock).

As a result, you can make money on mergers and acquisitions even if the deal doesn’t go through. But it’s a bit early to make a specific bet on an acquisition. JANA has a mixed track record with its activist investments. In recent years, it’s lost big on poorly timed investments in QUALCOMM (Nasdaq: QCOM) and Walgreens (Nasdaq: WBA).

According to a Bloomberg report, their list of potential suitors to buy Whole Foods includes Kroger and Albertsons, as well as Amazon. But none of these companies has commented on the matter yet. We’ll have to keep our ears to the ground for the next couple of months.

Whole Foods built a business empire out of the organic food movement... but that empire has declined as others copied their ideas. Now that the grocer is a takeover target, you have a chance to net some healthy profits from it.

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