Health Stocks: Are Premium Grocers and Others Worth a Buy?

WFM and other health stocks are taking a beating, but don't try to catch the falling knives

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Health Stocks: Are Premium Grocers and Others Worth a Buy?

Health Stocks — Casual Dining

Chipotle 150x150 Health Stocks: Are Premium Grocers and Others Worth a Buy?OK, so organic grocers are best avoided at current prices. But what about health-conscious casual dining?

A growing, high-margin business that fits the general theme of organic fare is Chipotle Mexican Grill (CMG), which avoids using genetically-modified food in most of its ingredients. Chipotle practically mints money with returns on equity consistently more than 20%. Chipotle also funds its expansion organically via cash flows and not via debt or share dilution.

Of course, Chipotle isn’t cheap by any stretch. It currently trades hands at 48 times earnings. The stock has also been in freefall for the past month, down about $100 per share. Investors have been concerned that rising food costs will erode profitability, and they probably will — at least in the short term.

Organic fare isn’t cheap, and Chipotle’s margins have been pinched in recent years due to rising food costs, so Chipotle is raising prices for the first time in three years. The increase will in the range of 3% to 5%, or about 25 cents per burrito.

I don’t make a habit of catching falling knives, so I wouldn’t recommend buying CMG shares today. But I would be a buyer in the mid-$400s if the share price can stabilize.

Another healthy dining choice to keep your eye on? Try Zoes Kitchen (ZOES), which just recently went public. I always recommend caution when discussing small IPOs (ZOES has a market cap of just $500 million), but the macro trend of healthier eating combined with the recent trendiness of the Mediterranean diet should bode well for the chain.


Article printed from InvestorPlace Media, http://investorplace.com/2014/04/health-stocks-wfm-cmg/.

©2014 InvestorPlace Media, LLC

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