CLASS IN SESSION : What Can Go Wrong When An Overvalued Stock Misses

The stock market is very complex these days and if you try to get too aggressive and fail to diversify you can be introduced to a world of pain in a millisecond even if the company you buy is unique. 

 

One of the best run supermarkets in the world is Whole Foods Market (WFM) as it sells food to customers who want to eat more healthy and thus can charge higher prices and have margins that are much higher than that of the average supermarket. The company is constantly expanding by building more and more supermarkets every quarter and still has a long way to go before its market is saturated. So the story is great. 

 

Unfortunately investors who shop in its stores love the experience so much that they have become emotional about it and decided to buy the shares in the company with out analyzing the financials. 

 

As a professional investor I try to do the following:

 

1) Get the Story right

2) Make sure I am buying at a discount 

3) Watch out for Macro-Events/ Geo-Political Events that bring everyone down.

 

So obviously Point #1 is great and Whole Foods gets a strong A+ on this point. But unfortunately on Point #2 we have a problem Houston!

 

 

 

 

As you can see the stock even though it has previous fallen from $65.59 down to $47.95 (-26.89%) is still $18 a share more than my Sell Price and unless its financials improved I would need for it to fall to $19.54 before buying it. Thus I have it on my list and will only consider buying it at $19.54 which will allow me to get a 50% upside profit before I would need to sell it. 

 

Well the company reported last night and they missed estimates by only 3 pennies and were inline on revenues.Unfortunately for them they guided revenues lower and they missed on already lowered analysts estimates, which is the equivalent to the curse of death, as Analysts lowered their estimates tremendously and management still missed. The Result???

 

 

Whole Foods Market, Inc. (WFM)

 -NasdaqGS  Follow

47.95 0.33(0.68%) May 6, 4:00PM EDT

Pre-Market : 39.37  8.58 (17.89%) 7:25AM EDT - Nasdaq Real Time Price

 

 

 

The problem that I have experienced since January 2013 has been that most of the 10,000 stocks I am tracking are overvalued like Whole Foods Market is. So as a professional, knowing what the true value of the stocks are I can not buy many for you. Those who walked into the store one day and fell in love with Whole Foods Market (as I have) and decided to buy the stock at $65 are owning a great company with an awesome story but are now down -40% in just a few months and could see much further losses going forward. 

 

So Peter Lynch, the famous Mutual Fund manager advised investors to buy what they know, but unfortunately did not also mention to buy it at a discount as well. The markets have been way overvalued going on two years right now, but because the Federal Reserve can not raise interest rates otherwise it would bankrupt the Federal Government and its $18 trillion in debt, we are therefore in a fantasy land situation were interest rates are at zero and Margin Debt is at all time highs. This all started in 2001 after the first crash, when then Federal Reserve Chairman Greenspan lowered interest rates and created the housing boom which eventually crashed and almost destroyed the housing industry in one shot. His replacement Bernanke thus was forced to lower them even more in 2008-2009 to mask the greatest depression of all time that actually happened but that was covered up with Fed printed money. Now his replacement Yellen is determined to keep interest rates at zero for at least another two years. So the Federal Reserve creates booms in stocks that always end up with bigger and bigger crashes after the markets decide to divebomb. In 2001-2003 we went down -45% and in 2008-2009 we went down -59%. The questions is since stocks are more overvalued now then they were in 2007, does that mean we go down even more in the next drop?

 

I hate losses more than anything so the system I designed and operate under should have us in 100% cash in the next crash, but you can see why pension funds are so underfunded even despite the recovery. The reason is that since the recoveries are 100% created by the Central Banks of the world they are fake, the truth eventually comes out and stocks crash. You can go to Fifth Avenue and buy a Rolex for $5000 or you can buy a Knockoff for $20. You may think you are getting a good deal but in two years the knockoff will stop working while the Rolex will last generations. The problem that we have in the stock market right now is that since investors have no clue what they are buying they are actually paying $5000 for the knockoffs instead of the real Rolex and by the time they realize their mistake they have no way to fix it as that $5000 they spent will eventually be worthless as they will have a $20 watch that is broken that they got conned into paying $5000 for.

 

So I will keep doing what I am doing and will not join the herd in paying $5000 for a $20 fake Rolex or the equivalent Twitter or Netflix stock. Then I will have my list ready when the markets finally correct and will try buying the real $5000 Rolex's for $2500. In the meantime if I find incredible bargains I will buy them as we wait for the correction to come.

 

Have a good day and CLASS DISMISSED!