Health food companies and organic food stocks have been booming lately. The Department of Agriculture’s Economic Research Service reported $28 billion worth of organic food sales in the U.S. in 2012 (the most recent data), worth more than 4% of total at-home food sales.
That was up by double digits from 2011 sales of about $25 billion, and more than 150% better than 2004 sales of $11 billion.
Just stroll down your local grocery store aisles and it’s hard to not see the big potential in organic foods and natural personal care products. After all, everyone from boutique merchants to the giants in packaged foods are trying to get in on the crazy by eliminating weird chemicals or ingredients in their products.
So how can investors play the organic and health food revolution?
Here are five ideas to consider eating up:
5 Organic Food Stocks to Buy: Natural Health Trends (NHTC)
Market cap: $420 million
YTD Performance: +190% vs. +3% for the S&P 500
Natural Health Trends (NHTC) is a small direct-selling organization that focuses on skin-care products such as lotions and vitamins. Whether it’s naturally-occurring antioxidants you’re after or juice from a noni fruit (whatever that is), NHTC stock has you covered.
In full disclosure, NHTC and its direct sales model are not without risk. Consider all the negative pressgiven to Herbalife (HLF) in part as a result of its model, and it’s easy to see how things could sour for Natural Health Trends.
However, NHTC is unique in that it’s actually an emerging-market play, with a whopping 98% of revenue made outside North America. In fact, Hong Kong is the leading region for sales, with $40.6 million in revenue last year — about 77% of the company’s $52.5 million in total on the year.
Best of all, NHTC stock performance is simply great and there is tremendous momentum here. With the untapped potential both in existing markets across Asia and in Western markets, this natural products company could be a good fit in aggressive portfolios despite its big run-up and small-cap status.
5 Organic Food Stocks to Buy: United Natural Foods (UNFI)
Market cap: $3.3 billion
YTD Performance: -14% vs. +3% for the S&P 500
United Natural Foods (UNFI) is one of the biggest organic food distributors in the space, and has been a major player for about two decades. While the ubiquitous Whole Foods (WFM) is its top client, worth about a third of total sales, UNFI also serves a variety of smaller organic retailers nationwide that provide diversity to revenue.
United Natural Foods has been aggressively growing by acquisition, including the recent buyout of Tony’s Fine Foods and Trudeau Foods, among others. As a result of these buyouts and strong growth to its existing business, United Natural Foods has seen revenue soar from about $5.2 billion in fiscal 2012 to almost $6.8 billion in 2014 — a roughly 23% increase in two years. Earnings have also been impressive, rising about 58% in the same period.
UNFI stock has admittedly softened up year-to-date, losing about 14% while the market is up about 3% in the same period.
But after the rollback, the company is a bargain at a price-to-sales ratio of 0.4 and a forward price-to-earnings ratio of about 20.
The best thing about UNFI stock is that it has the ability to grow independent of individual merchants that wind up being winners and losers. As a distributor, it simply acts as the middle man of the natural and organic foods trend — allowing investors to play the movement with limited risk.
5 Organic Food Stocks to Buy: Hain Celestial (HAIN)
Market cap: $6.5 billion
YTD Performance: +8% vs. +3% for the S&P 500
As the company behind some of the best-known brands in the organics space, including Celestial Seasonings tea and Earth’s Best packaged foods, Hain Celestial (HAIN) is a major player in this sector.
And like United Natural Foods, the big potential in the industry has spurred a series of acquisitions over the past few years to ensure continued dominance. This includes the acquisition of rice products company Tilda in 2014 for $357 million as a way to bolster its gluten-free offerings to tap into this fast-growing sub-segment of the organic marketplace.
Thanks to these moves, Hain Celestial has seen a five-year growth rate of about 30% annually in its top line, and is looking at almost $3 billion in sales next year. No wonder HAIN stock is up more than 37% in the past 12 months and almost 90% in the last 24 months to dramatically outperform the market.
Like UNFI, Hain is not a merchant and thus doesn’t have to worry about the ups and downs of expansion and point-of-sale operation. As consumer demand increases and mainline retailers from grocery stores to Walmart (WMT) carry more organic and natural products, HAIN can ride the wave to bigger sales and profits and let others do the heavy lifting of distribution.
5 Organic Food Stocks to Buy: Sprouts Farmers Market (SFM)
Market cap: $4.7 billion
YTD Performance: -10% vs. +3% for the S&P 500
A very young stock in the organics space, but one still worth watching, is Sprouts Farmers Market (SFM). Although the midcap stock has given some investors a bit of indigestion since SFM went public in mid-2013, with modest volatility and an overall return that is negative since its IPO, don’t count out this company just yet.
In addition to the tailwind the broader industry enjoys, Sprouts has — pardon the pun — a more organic path to growth than Hain or UNFI; the improvement in fundamentals is owed to more shoppers and same-store sales growth rather than acquisitions.
Revenue has been steadily rising, up to almost $3 billion in 2014 from $2.4 billion in 2013 — a roughly 25% increase. Furthermore, earnings are also growing at a nice clip.
Maybe that’s why despite the downdraft and rather ho-hum outlooks from analysts, targets still remain about 20% above current levels. Take RBC Capital Markets, which recently revised its price target down to $36 thanks to soft inflation data among other things. But given the current price of less than $30, that isn’t all that bad. BMO Capital actually upgraded to outperform with a $36 target, too.
In May, the company reported a very impressive same-store sales growth rate of 4.8% — showing that this is not just a company banking on new locations to succeed.
That bodes very well for the long-term of this mid-cap organics play.
5 Organic Food Stocks to Buy: Whole Foods Market (WFM)
Market cap: $14.8 billion
YTD Performance: -18% vs. +3% for the S&P 500
We finish with the poster child for healthy veggies and locally sourced produce, Whole Foods Market. WFM has exploded over the past few years, though admittedly things haven’t been all that grand in recent months and WFM is right back where it was at the beginning of 2013.
Overly aggressive expansion and unrealistic expectations have became a problem for Whole Foods, but Q1 numbers were stronger than expected and WFM is making a concerted effort to move away from its overpriced reputation by going cheaper and more convenient with a new chain of stores.
And let’s not forget, Whole Foods has a strong brand with upscale consumers willing to spend more for nutritious (and tasty) offerings from Whole Foods aisles. There may be challenges to growth here, but there are at least margins — something many grocery stores would kill for.
Despite the short-term headwinds, this stock seems to be at the heart of the organic revolution for investors who are interested. WFM is trading for a slight discount to sales and has a pretty modest forward P/E of about 21 – greatly reduced from previous years when it was a frothy play.
If you’re looking for long-term stability in the organics food space, you can’t beat Whole Foods.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
