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, 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.
So how can investors play the organic and health food revolution?
Here are a few ideas:
Walmart: Believe it or not, WMT recently decided to apply its low-price approach to organic produce in a big way. Walmart is the top grocer in America with a whopping 18% market share, so while this big-box retailer might not stand out as a pure play on organic sales, it is assuredly in a position to benefit from Americans who want to healthier and who are worried about pesticide use on their produce. Just keep in mind that WMT stock hasn’t managed to do much for investors lately, sitting on a slight loss in the past 12 months vs. a 15% gain for the S&P 500 in the same period … so it might take a lot of kale and clementines to offset sluggish spending across this retail chain.
Whole Foods Market: The poster child for healthy veggies and locally sourced produce, Whole Foods Market (WFM) has exploded over the past few years. WFM stock is up more than 400% since spring 2009 thanks to aggressive expansion and a strong brand with upscale consumers willing to spend more for nutritious (and tasty) offerings from Whole Foods aisles. Still, WFM has rolled back in the past six months on fears that the stock has hit a wall; Whole Foods has given up almost 25% from its all-time high of more than $65 in October. Stiff competition and plateauing growth are to blame, but so is the waning momentum and crumbling sentiment that Lawrence Meyers pointed out on InvestorPlace.com last fall when WFM started to crack. Still, despite the short-term headwinds, this stock seems to be at the heart of the organic revolution for investors who are interested.
United Natural Foods: Though a lesser-known play on organics, United Natural Foods (UNFI) is one of the biggest distributors in the space, and has been a major player in organic and natural foods for about two decades. While the ubiquitous Whole Foods 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. UNFI has been aggressively growing by acquisition, including four deals in the past two years. As a result of these buyouts and strong growth to its existing business, United Natural Foods has seen revenue soar from about $3.75 billion in fiscal 2010 to a projected $6.75 billion for 2014. UNFI stock has admittedly softened up in the past several weeks, down about 12% from its March high. But even so, UNFI has returned 30% in the past 12 months to easily outperform the 15% gains by the S&P in the same period.
Hain Celestial: 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. Most recently, HAIN acquired rice products company Tilda in January for $357 million as a way to bolster its gluten-free offerings to tap into this fast-growing subsegment of the organic marketplace. And before Tilda, Hain snapped up Ella’s Kitchen Group about a year ago to bolster its line of organic baby foods. Thanks to these moves, Hain Celestial has seen expansion from sales of $917 million in 2919 ti over $2.1 billion forecast for the current fiscal year. No wonder HAIN stock is up over 43% in the past 12 months and over 430% since the 2009 lows to dramatically outperform the market.
Sprouts Farmers Market: 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 of about negative 11%, don’t count out this company just yet. In addition to the tailwind the broader industry enjoys, Sprouts has a — pardon the pun — 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. That’s why UBS recently upgraded SFM stock from “neutral” to “buy,” with a $43 price target — 20% upside from here. Separately, analysts at Guggenheim and BMO also increased their outlook on Sprouts.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.