One of the long-term investor’s greatest advantages is the utilization of a concept known as time arbitrage. Investopedia defines time arbitrage as:

An opportunity created when a stock misses its mark and is sold based on a short-term outlook with little change in the long-term prospects of the company. This miss occurs when a company fails to meet earnings estimates by analysts or its guidance, resulting in a short-term stumble where the price of the stock decreases. Some investors use time arbitrage to increase their chances of outperforming the market.

Basically this means that as long-term investors, we can use Wall Street‘s short-term focus to our advantage. As the sell-first-and-ask-questions-later crowd is running for the exits, we can calmly step in and buy shares of great businesses at more attractive prices.

But here’s the key: We must have confidence that the business‘s long-term competitive advantages are still intact. Otherwise, we may be stepping in front of a bus. For if the company’s short-term struggles are signs of further danger ahead, buying ahead of that decline will lead to steep losses. However, if nearsighted traders are overestimating the impact of a temporary downturn in a company’s business performance, buying into that weakness could give long-term-minded Fools a powerful profit opportunity.

The ability to tell the difference between a business that is in a state of decline and one that is only temporarily struggling and poised for a rebound is often a key factor in whether an investor can earn market-beating returns. At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I’ve used time arbitrage to help us achieve a 33.87% return since Tier 1 was launched on Sept. 1, 2011, besting the S&P 500 by 421 basis points over that time. And today, I believe I’ve found another time arbitrage opportunity in Whole Foods Market .

The sell-off
Whole Foods‘ shares are down around 10% since it reported first-quarter results that disappointed Wall Street. The natural-foods grocer beat earnings-per-share expectations by a penny and rang in revenue right in line with estimates, but same-store sales growth of 7.2% fell short, and Whole Foods reduced guidance for the rest of the year. Management also stated that gross margin will likely come under pressure in the coming quarters as Whole Foods expands its value offerings in what can be viewed as an attempt to shed the “Whole Paycheck” moniker and strengthen the value perception of its brand.

The risk
Many traders are concerned that Whole Foods is playing defense by sacrificing gross margins in order to preserve sales that would otherwise be lost to competitors. These bears argue that because of this, Whole Foods no longer deserves its premium valuation, and its stock should continue to decline in price.

I respectfully disagree.

The opportunity
While there’s no denying that competition in the natural and organic foods market has increased, I believe that Whole Foods is going on the offensive by appealing more to the …read more
Source: FULL ARTICLE at DailyFinance