I receive a regular email newsletter from Dole‘s (NYSE:DOLE) Nutrition Institute. Despite its obvious marketing message, it does provide helpful information about eating and living right — a growing trend in North America.
Inevitably, any discussion about health and wellness involves Whole Foods Market (NASDAQ:WFM), America’s leading purveyor of quality natural and organic products. But investors who have kept their eyes and ears open to the healthy eating movement (tested by recession) not only have been handsomely rewarded by WFM since the market lows of March 2009, but by a number of health-minded food stocks. Can the run continue?
|Whole Foods Market||WFM||734.8%|
|Hain Celestial Group||HAIN||507.1%|
|United Natural Foods||UNFI||304.9%|
|The Fresh Market||TFM||164.4%*|
|SPDR S&P 500 ETF||SPY||122.5%|
|* The Fresh Market’s total return is from Nov. 8, 2010
** Annie’s total return is from March 28, 2012
Annie’s (NYSE:BNNY) performance in five months of public trading is impressive. The maker of organic macaroni and cheese and other easy-to-prepare meals gained almost 90% on its first day of trading and hasn’t looked back. The Fresh Market (NASDAQ:TFM), which started with one 14,000-square-foot grocery store in 1982, now has 115 stores in 20 states. It went public in 2010, gaining a respectable 46% on its first day and another 81.1% since.
The five companies above have averaged a monthly return of 13.8% compared to 2.9% for the SPY. If you take out Annie’s and The Fresh Market, which haven’t been trading since March 2009, the average drops slightly to 12.3%, still 940 basis points higher than the SPY.
Any way you look at the group’s performance, you can’t help but think, “If only I had invested in these companies instead of Best Buy (NYSE:BBY) or some other disappointment …”
There’s two simple reasons why these companies have done well:
- We all need to eat.
- More of us want to eat well.
When the market went into the tank in late 2008, investors feared the worst about the healthy food industry. We assumed consumers would balk at higher prices and find cheaper alternatives, then having done that, they would never switch back. Wrong. Instead, consumers adjusted their budgets to ensure they continued eating right. While the segment of America that exclusively shops at Whole Foods is tiny, it has become increasingly clear that America is tiring of being the fat kid on the block.
In late July, cooking and food writer Michael Ruhlman asked Tracie McMillan to write a blog post about her experiences investigating the American food system. McMillan’s book, The American Way of Eating: Undercover at Walmart, Applebee’s, Farm Fields and the Dinner Table, drops her into several low-paying jobs where she explores how our food is grown and sold. According to McMillan, the No. 1 thing she learned writing the book is that everybody wants good food. The only problem is not everyone can afford it — yet.
Healthy eating is not going away, folks. It might take another 20 years for nutrition experts to convince us, but it’s going to happen. The five companies above are all built around this reality.
Hain Celestial Group (NASDAQ:HAIN) delivered excellent fourth-quarter earnings Aug. 22 along with improved guidance for fiscal 2013. More importantly, it is buying Premier Foods plc — a manufacturer of honey, jams and other grocery brands — for $318 million. Although Premier doesn’t produce natural and organic products, the purchase more than doubles its revenue in the U.K. while also providing distribution in major chains like Tesco (PINK:TSCDY) and Sainsbury (PINK:JSAIY). Look for the U.K. to be a huge driver of growth.
One of the problems with Americans eating better is that certain areas are like food deserts, where mainline grocery stores are unwilling to tread. Detroit is a prime example. Up until Whole Foods announced it was opening a store in the downtown core in early 2013, there wasn’t a single major grocery chain among the 700,000 residents. Detroit isn’t the only place where Whole Foods is going. It plans to triple its store total to over 1,000 by opening in underserved and smaller markets. In Toronto alone, it could open 10 additional locations with almost no cannibalization. Possessing almost limitless opportunities and a trend toward better eating, Whole Foods has at least 10 years of growth ahead of it.
Canaccord Genuity’s annual Global Growth Conference recently took place and analyst Scott Van Winkle heard good things from Whole Foods, United Natural Foods (NASDAQ:UNFI) and Annie’s. Apparently, the media commentary about rising food prices is overblown and all three see margins remaining strong. While some input costs are definitely on the rise, many others are lower. The general consensus coming out of the conference was one of confidence in the future.
All five companies have seen their stock prices rise by more than 40% year-to-date. Valuations are definitely stretched. That doesn’t mean long-term investors should avoid putting money into them right now — it just means that you might want to have some cash in reserve for the inevitable pullback.
Other than that, have at it. This is one area of the market whose momentum should carry on indefinitely.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.