I’m not a fan of supermarkets these days. While they desperately fight off challenges from stores like Dollar Tree (NASDAQ:DLTR) and the organic juggernaut that is Whole Foods Market (NASDAQ:WFM), they keep losing market share. Big grocers like Safeway (NYSE:SWY) have had to introduce private-label brands and increase their organic offerings to stay competitive.

But how do you stay competitive when you can go to Target (NYSE:TGT) for everything you might need, while a grocery store provides only groceries?

That’s when it hit me: I’ve been looking at the wrong part of the sector. The money isn’t in retailing, it’s in distribution and sometimes in production. That’s the case with almost every industry.

And so I found Hain Celestial Group (NASDAQ:HAIN), and even better, its niche is in manufacturing, marketing and distributing natural and organic foods. The unadmitted secret of the organic movement is that it plays upon people’s fears. The truth is that people choose organic because it’s perceived as “healthier,” which is just a code for “less likely to cause cancer.” Gimme some of that fearmongering!

Hain provides a huge range of products. We’re talking lots of the stuff you find in Whole Foods Market, whether it be granola bars, pasta, yogurt, chocolate, frozen fruit and vegetables, soups, infant formula — and so much more. Hain also has snack products and personal care products. It even provides fresh prepared foods.

Here are a few of the brand names you’ll recognize: Arrowhead Mills, Spectrum, Hain Pure Foods, Mountain Sun, Celestial Seasonings, Rice and Soy Dream. Heck, just check out the website.

The key to Hain’s success is that it produces high-quality consumables. You can have the largest distribution network in the world, but if your food stinks, you’ll die. As long as it keeps getting good food out to the organic community, Hain will continue to grow. People will always try new brands, but if Hain’s distribution deal with Whole Foods keeps its products on the shelves, then it has leverage that newcomers don’t.

Profit has been growing at the company. The fiscal year ending in June 2010 saw a bottom line of $28.6 million, which grew to $55 million the next year and then $79.2 million in fiscal 2012.

Hain released its latest earnings last week, and numbers look good, even though they missed revenue expectations. Second-quarter earnings came in at 67 cents vs. 44 cents last year. Net sales rose 24.8% year-over-year to $455.3 million, and up 9.4% on a comp basis. Hain even saw a near 100% sales increase in the U.K., so the organic movement has caught on across the pond. The company has manageable debt of $635 million and $42 million of cash.

Now for the issue I dread: valuation. Usually, when I see a company performing this well, it’s wildly overpriced. For this year’s earnings estimates of $2.45 per share, an increase of about 32% over last year, and a stock price of about $60, Hain trades at 24.5x earnings. On the one hand, it seems undervalued on a near-term basis. However, fiscal 2014 and long-term earnings are expected to grow only 17%, suggesting it’s vastly overvalued.

What we have here is a classic case of small-cap growth stock syndrome. Do you pay up for a company that’s growing strongly, in a niche that’s exploding, with about $100 million in trailing 12 month free cash flow?

Given that the debt service is only $17 million or so annually, I think you can justify buying in here. That’s what you pay for a small-cap growth company.

As of this writing, Lawrence Meyers owns shares of Dollar Tree Stores.