Most traders and investors are drawn to a smooth trend, that being a movement whose highs and lows are progressive, consistent, and easily traceable. The problem is when this characteristic is exhibited by a relatively unpopular stock in a sector that’s not necessarily associated with growth.
Sprouts Farmers Market (SFM) isn’t the sexiest stock on Wall Street. But on Main Street, in neighborhoods it serves, it’s a popular hybrid grocery and specialty store that stands a few notches above your typical grocer. It’s a Consumer Staples stock that (depending on the forecast source) has delivered nothing less than upside surprises each quarter since 2019.
Technically, Sprouts Farmers Market’s upward trajectory has been as smooth as its (fundamental) earnings trend. The trading volume may be a bit low, but its market presence is relatively strong as a company. And it’s one of a few stocks that came up on the StockCharts “All-Time High” scan.
For those looking to get some exposure to Consumer Staples in a stock exhibiting consistent growth, is Sprouts Farmers Market a good candidate for a buy, or might its record high be subject to the weight of market gravity? Let’s take a look.
Looking at Sprout Farmers Market’s five-year performance, you can see it trending downward in 2019, culminating in the 2020 COVID Crash bottom. Interestingly, every quarter has delivered a positive earnings beat except for the reporting period in August 2019 (black arrow).
After bottoming out in 2020, you see a volatile-yet-steady uptrend, despite mostly negative readings in the Chaikin Money Flow (CMF) indicator. And once the money flow turned positive in 2022, the trend channel began to narrow (see blue channel), leading to the current month, where Sprouts Farmers Market is consolidating at its all-time high range and near the top of the trend channel.
So, what does the near-term picture look like?
The top panel indicates that Sprouts Farmers Market has consistently and steadily outperformed its sector, Consumer Staples (using XLP as the sector proxy).
On the price chart panel, the 50-day simple moving average (SMA) and 200-day SMA are in “full sail” with a smooth uptrend curve; more importantly, you can see how SFM’s stock has been responding sensitively to both moving averages, seeing either as opportunities to buy the dip.
At the end of December into the new year, Sprouts Farmers Market’s stock price consolidated in a rectangle formation. This is a continuation pattern that, according to Thomas Bulkowski’s Encyclopedia of Chart Patterns, tends to break to the upside 63% of the time. However, looking at the Relative Strength Index (RSI) displayed in the panel below the chart, you see it’s falling from overbought territory as SFM consolidates, hinting at a potential near-term pullback.
The Upside Scenario
With no resistance overhead (Sprouts Farmers Market is at an all-time high), the typical projection for a rectangle trade (giving a target equivalent to the pattern’s height) might be too small relative to the downside risk. This is where looking at fundamentals and the larger economic picture can help gauge the likelihood of a prolonged uptrend. SFM can break toward the upside, but will it have enough momentum to keep going without taking a breather?
The Downside Scenario
A pullback seems warranted, at least sometime before Sprouts Farmers Market’s next earnings reporting period in February. So you’ll want to closely monitor the price action between now and February 29, SFM’s next earnings reporting date.
According to Bulkowski, there’s a 37% chance that price will break below the rectangle. Considering how the broader market is taking a breather after a six-week run to the upside, SFM will likely get caught in that tide. Still, even if SFM falls to the 50-day SMA, the intermediate-term uptrend would still be valid. And considering the quiet bullishness surrounding the stock (for those who know about it) and how its buyers seem to take every opportunity to jump in as prices reach the 50-day (and 200-day) SMA, it’s likely to provide ample support for SFM. In other words, the 50-day SMA makes for a favorable opportunity to buy the dip.
The Bottom Line
Though not a high-profile item, Sprouts Farmers Market (SFM) has given investors consistent growth. Its trend has been upward since the 2020 downturn, with positive earnings surprises each quarter and a solid “Main Street” market presence overall. It has been outperforming its sector, indicating the potential for continued growth. But there’s also a possibility of a near-term pullback, as the stock seems overbought. If you want to gain exposure to Consumer Staples, Sprouts Farmers Market is a good candidate. If it breaks to the downside, look to the moving averages as your entry point and keep an eye on its price action, leading to its next earnings date in February.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.