Investing on the Healthy Eating Revolution
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Eating healthy or choosing tasty food, that used to be the dilemma faced by consumers over many when sitting at the eating table. But the old paradigm is coming to an end, as many innovative companies are finding ways to deliver mouthwatering food choices which are also good for their customers’ health and overall wellbeing. The trend has many reasons to continue growing strongly over the following years, and investors should pay close attention to the opportunities emerging from it.
Shares of Hain Celestial (NASDAQ: HAIN) jumped by a whopping 19% last Thursday as the maker of organic and natural foods delivered earnings well above analysts’ expectations. The economic environment is not precisely ideal for companies in this business, as lackluster consumer spending coupled with raising food prices could reasonably be expected to have a toll on their profitability. But none of these factors is derailing Hain Celestial from its growth trajectory; the stock is trading at all-time highs and accumulates a return of more than 113% in the last year.
Whole Foods (NASDAQ: WFM) is another company doing extraordinarily well under uninspiring conditions thanks to growing demand for organic and healthy food. The company has produced an annual increase of 12.5% in sales over the last five years, and last quarter was really impressive with an 8.2% increase in comparable store sales. Whole Foods even saw increased gross margins at a 36% vs. 35.4% in the previous year, and management raised its full earnings forecast to $2.51-$2.52 versus a prior range of $2.44-$2.47.
Organic food and fresh products are not only healthier than other alternatives, they also taste better than more artificial products, and in that way they provide an interesting solution for the old healthy versus tasty food dilemma. Environmental and sustainability considerations are also another factor which helps these companies when trying to convince their customers to pay some extra bucks to join the natural food movement.
Demographically, these companies are positioned in a – naturally – sweet spot. Younger generations are more prone to consider healthier alternatives for themselves and their kids; change usually starts by the younger and expands from there to other demographic groups. Children who are being raised eating good tasting natural food are unlikely to go into to highly processed, more artificial, products as they grow older.
It´s not only about organic food producers, Starbucks (NASDAQ: SBUX) is betting big into the health trend with initiatives like Evolution Fresh and low calories products mixed with its more fattening offerings. Even if most customers are still choosing those caloric lattes, Starbucks is looking to expand its cultural footprint by adding a wide variety of healthy products which could propel the company into its next growth stage.
Even the fast food industry is being transformed by new eating habits, and Chipotle Mexican Grill (NYSE: CMG) is one clear example about that. The company calls its philosophy food with integrity, which highlights the cultural facet of the healthy eating trend. Focusing on organic, family farmed and locally sourced ingredients has produced outstanding returns for the company and its shareholders in the last years: the stock has come a long way from the $50 area in 2009 to near $290 lately.
And that´s after falling nearly 20% due to disappointing numbers in the last quarter. That last disappointment, however, seems more based on excessive expectations prior to the report than on underlying weaknesses at the company level. Chipotle reported an 8% increase in same store sales during the last quarter, and the company has delivered an outstanding 22.5% annual increase in sales over the last five years.
To put it into perspective, McDonald's (NYSE: MCD) is showing negative same store sales for the last quarter, and over the last five years sales have increased at much lower 5.3% annually at the fast food giant. The comparison is not completely fair; McDonald´s is a much bigger company than Chipotle, so it should logically have a slower growth rate. Still, growth in the fast restaurant business is coming from organic burritos and not from cheeseburgers, and that´s a part of a much wider trend.
Companies in the healthy eating trend usually trade at higher valuations in comparison to more traditional food producers, in many cases investors need to pay P/E ratios above 30 or even 40 times earnings to invest in these businesses, while old school food producers usually trade bellow a P/E ratio of 20. Patience is advised in order to avoid paying excessive valuations in the sector, and waiting for a pullback in the strongest names seems like a good idea.
But higher stock valuations don´t change the fact that the healthy eating trend will provide many growth opportunities for investors over the following years. It used to be tasty versus healthy food, but now the key is delivering products which are both more attractive to our senses and better for our bodies.
Consumers are willing to pay extra for these kinds of products, even in an uninspiring economic scenario, and this reflects very positively on the underlying strength of the eating revolution. Over the next several years, what´s good for your health may end up being good for your portfolio too.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, The Hain Celestial Group, McDonald's, Starbucks, and Whole Foods Market. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, Starbucks, The Hain Celestial Group, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.