Five Things to Know About This Healthy Grocer

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Natural Grocers (NYSE: NGVC) have recently skyrocketed. Like its larger peers Whole Foods (NASDAQ: WFM) and The Fresh Market, (NASDAQ: TFM) Natural Grocers benefits from demand for healthier products. Natural Grocers isn't just a smaller version of another health food store, though. This grocery store has its own strengths and weaknesses, and five topics hold particular importance.

Insider ownership

The Isely family took Natural Grocers public last year, and this family still has a great deal of control over the health food retailer. According to Yahoo! Finance, Natural Grocers has 60.2% insider ownership. The Fresh Market also has a sizable amount of insider ownership at 20.5%. Whole Foods has 0.6% insider ownership.

An IPO in a hot sector, such as health food, can create an opportunity for a company's original owners to cash out at a high valuation. High insider ownership in July 2013 shows that the Isely family has confidence in Natural Grocers, which makes a long-term investment in this grocery store look more attractive. The Iselys' stake in this grocer could also have implications for short sellers.

Short sellers

The health food stores' high valuations have attracted short sellers. The bears look most interested in Natural Grocers, as shown by the short percentage of float figures for these three grocers. On June 14, 2013, this statistic was 20.7% for Natural Grocers, 15.1% for The Fresh Market, and 2.2% for Whole Foods, according to Yahoo! Finance. Whole Foods reports on July 31, which will provide information about the state of the health food sector in general. If Whole Foods posts good results for the third quarter of 2013, Natural Grocers and The Fresh Market could experience a short squeeze.

Stocking decisions

Health food stores pay very close attention to their stocking decisions. Natural Grocers provides a list of products it won't sell, which includes products available at Whole Foods Market and The Fresh Market. For example, Natural Grocers does not sell alcoholic beverages and it does not have bakeries in its stores. Natural Grocers also doesn't offer disposable shopping bags to its shoppers. Natural Grocers has still achieved rapid growth under these self-imposed restrictions, though.

Margins

Natural Grocers also has lower margins than its peers. This grocer currently has a gross margin of 29%, lower than Whole Foods' 36% gross margin and The Fresh Market's 34% gross margin. Two important factors could affect health food companies' future margins, though. First, higher demand for organic food could convince more farmers to grow organic food, lowering grocers' overall supply costs. The rapid growth of health food companies makes this scenario look more likely. Health food stores also want to shed their reputation for high prices, which could mean lower margins. Elizabeth Smith, at Whole Foods, wrote an article about going organic on a budget.

Valuation

Even after considering the growth expectations for Natural Grocers, this health food stock looks expensive. Natural Grocers has a forward P/E of 62 and a PEG ratio of 2.65. Whole Foods has a forward P/E of 32 and a PEG ratio of 2.07, while The Fresh Market has a forward P/E of 28 and a PEG ratio of 1.58. Whole Foods and the Fresh Market aren't cheap either, but these stores look more attractively priced than Natural Grocers right now.

Takeaway

Natural Grocers has been a risky CAPS pick that paid off big. This health food store's stock has gained 94.0% since July 30, 2012 while the S&P gained 19.2%. High insider ownership and the popularity of health food related stocks may help explain this rally. At the same time, Natural Grocers' gross margin and valuation don't look appealing right now. This health food store needs to achieve higher margins to look appealing at its current price.


Eric Novinson owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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