Two well-known supermarket stocks did something bizarre recently, leaving Jim Cramer to wonder what the heck just happened.
Two natural and organic supermarkets and two drastically different results.
No, people didn't suddenly start shopping at Whole Foods again after ignoring the place for months. Cramer boiled the reasoning for this unusual behavior down to expectations.
The quarter that sent Whole Foods soaring was super impressive, and the guidance wasn't fantastic. However, the stock had been down for so long, that even its modest earnings beat was enough to send the stock higher. So, while earnings weren't stellar, they were better than many investors thought.
Sprouts reported slightly weaker than expected revenue, but its full-year guidance was actually higher than what analysts expected.
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Thus, if the two quarters were compared in a vacuum, Sprouts looks like it is doing much better than Whole Foods. Yet, Whole Foods rallied and Sprouts got slammed.
On Sprouts' conference call, management acknowledged that there was a slowdown in traffic toward the end of the quarter, which wasn't good since traffic had already slowed from the previous earnings period.
Suddenly, investors feared that the same competition that crushed Whole Foods could crush Sprouts.
On the other hand, believers in Whole Foods growth were driven away ages ago. No one expected it to deliver fantastic numbers anymore. And while the company's most recent results were better than many feared, analysts applauded management for implementing cost controls during the quarter.
"In other words, when your stock is in purgatory, doing one thing really right is enough to get your share price roaring," Cramer said.
Cramer is still wary of Whole Foods, but he did note that management seems confident in their ability to execute a turnaround, especially now that it is implementing a new smaller-format, value-oriented chain called Whole Foods 365.
"I think near and even medium term this story could be pretty choppy, but longer term, as the 365 concepts get rolling and the value initiatives take effect, I bet Whole Foods can eventually get back on track. You just might have to wait for quite some time," Cramer said.
As for Sprouts, it still remains one of the few high-growth retailers out there. However, increasingly supermarkets are offering the same goods as these natural and organic plays, which could impact growth.
So, when a stock has been down so long that no one expects anything, a stock like Whole Foods can rally easily. But when investors have great expectations, like they did with Sprouts Fresh Market, the stock can get hammered.
"Personally, I would avoid the whole space for the moment. Retail is tough right now, with Amazon making inroads even in the grocery business," Cramer said.
Cramer recommended watching from the sidelines, because right now it is too hard to make a judgment on these stocks.