Three Growth Stocks in the Health Food Business

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

I have been on a journey teaching my family and myself the art of eating a healthy, nutritious diet. It occurred to me my research could be used to find companies worthy of my investment dollars.

The Search for Successful Health Food Stocks

There are a number of successful health food companies in the marketplace. One of the most successful is Hain Celestial. The company produces and markets a variety of natural and organic food products. Take a look at their price chart over the past few years.

<img src="http://media.ycharts.com/charts/508fc00f50005226521d800d9bc9d467.png" />

HAIN data by YCharts

My goal is to find another Hain Celestial, a profitable company poised for growth. The companies may grow on their own like Hain Celestial, buy other companies or eventually be bought by competitors or the big food players. Whatever the scenario, I want these companies to help grow my portfolio.

Food producers, distributors and grocery stores were all considered. Although not an exhaustive list, I made a good start exploring this niche market.

I eliminated large food companies with health food brands, Kellogg’s being one example. Kellogg's owns Kashi, Gardenburgers and Morningstar Farms. Con Agra brands include Egg Beaters and Healthy Choice entrees. PepsiCo owns Quaker brands, including Quaker oats, natural cereals and granola bars. General Mills’ brands include Cascadian Farm and Muir Glen. Health food advocates may contend some of these products should not be considered health foods, but that is an argument for another time.

Many familiar brand names are not public companies or owned by a parent company. Amy’s Kitchen makes organic, vegetarian ready-to-eat entrees, and Turtle Island Foods produces the tofurkys found alongside poultry turkeys at many Thanksgiving dinners. Both are family owned firms.

Annie's

The first company researched was Annie’s (NYSE: BNNY). I use Annie’s salad dressings and am familiar with many of their other products, including cereals, cookies and crackers, and macaroni and cheese. I am a fan of Warren Buffett’s rule of buy what you know. I know Annie’s products. I can monitor them on store shelves, note new product offerings, observe which products are not moving, and discover which stores are adding or removing the product line.

I look for companies with high-quality products, management teams with a solid performance history and strategic planning initiatives, and strong financials. Annie’s meets my criteria, although currently its stratospheric P/E - 172.46 - means potential investors should monitor the company and buy the dips. Look at their price chart since the company went public March 28, 2012.

<img src="http://media.ycharts.com/charts/9cf6156a52730fecc881338ffd6aa46f.png" />

BNNY data by YCharts

Companies Rejected and Companies Selected

I researched and rejected a number of small companies currently in penny stock territory, including Innovative Food Holdings, Artisanal Brands, and Jones Soda. The financials for Crumb’s Bake Shop and Reed’s were awash in red ink. Too risky.

The supermarket chain Whole Foods Market (NASDAQ: WFM) has successfully carved a niche in the organic and health food market. The recession hurt sales, but the company began offering lower-priced products, retaining customers and attracting new ones. United Natural Foods (NASDAQ: UNFI) distributes organic and health food products throughout the U.S. and Canada. SunOpta (NASDAQ: STKL) is a Canadian concern specializing in sunflower, soy and corn food products, focused on the private label market. The Fresh Market (NASDAQ: TFM) operates a chain of specialty food stores in the East, Mid West and California.

Some data for Annie’s, Whole Foods, United Natural Foods, Fresh Market and SunOpta is summarized in the following table: 

<table> <tbody> <tr> <td> <p> </p> </td> <td colspan="2"> <p><strong>Revenues</strong></p> </td> <td> <p><strong><br /></strong></p> <p><strong>Gross Margin</strong></p> <p><strong> </strong></p> </td> <td> <p><strong>Revenue/</strong></p> <p><strong>employee</strong></p> </td> <td> <p><strong>Income/</strong></p> <p><strong>employee</strong></p> </td> <td> <p><strong>Current P/E</strong></p> </td> </tr> <tr> <td> <p><strong>Annie’s</strong></p> </td> <td> <p>141.30M</p> </td> <td colspan="2"> <p>36.25%</p> </td> <td> <p>1.52</p> </td> <td> <p>.14</p> </td> <td> <p>172.46</p> </td> </tr> <tr> <td> <p><strong>SunOpta</strong></p> </td> <td> <p>1.07B</p> </td> <td colspan="2"> <p>16.14%</p> </td> <td> <p>.57</p> </td> <td> <p>.01</p> </td> <td> <p>79.47</p> </td> </tr> <tr> <td> <p><strong>United Natural Foods</strong></p> </td> <td> <p>5.24B</p> </td> <td colspan="2"> <p>19.18%</p> </td> <td> <p>.75*</p> </td> <td> <p>.13*</p> </td> <td> <p>31.42</p> </td> </tr> <tr> <td> <p><strong>Fresh Market</strong></p> </td> <td> <p>1.11B</p> </td> <td colspan="2"> <p>31.48%</p> <p> </p> </td> <td> <p>.13</p> </td> <td> <p>.01</p> </td> <td> <p>56.01</p> </td> </tr> <tr> <td> <p><strong>Whole Foods</strong></p> </td> <td> <p>10.11B</p> </td> <td colspan="2"> <p>37.06%</p> </td> <td> <p>.16</p> </td> <td> <p>.01</p> </td> <td> <p>50.47</p> </td> </tr> </tbody> </table>

 *The revenue/employee and income/employee for United Natural Foods were not available from financial sources online.  I estimated United Natural Foods’ revenue and income per employee based on the number of full-time employees, but the company hires an unknown number of part-timers. I do not consider the numbers reliable.

Now compare the price charts for these five stocks over the past decade.

<img src="http://media.ycharts.com/charts/5378ee4def2b7be1d3dd7eaa21ca62ea.png" />

BNNY data by YCharts

My conclusions?

All have high P/Es, a deterrent to value investors and a warning about future price appreciation. They all weathered the Great Recession and grew their business. Whole Foods is a solid company, but at current valuations I do not see a lot of near-term potential. SunOpta numbers indicate slower growth than the other companies, and its price chart is flat. The company offers shareholders no dividend while waiting for price appreciation. 

I like United Natural Foods, Annie’s, and The Fresh Market. It might be a good idea to buy a few shares now and wait until stock prices decline somewhat before buying additional shares.

Dig Deeper

It's hard to believe that a grocery store could book investors more than 30-times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this brand new premium report on the company, The Motley Fool walks through the key must-know items for every Whole Foods investor, including the key opportunities and threats facing the company. We're also providing a full year of regular analyst updates to go with it, so make sure to claim your copy today by clicking here.


mercyn has positions in Hain Celestial, Annie's, and General Mills. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend The Fresh Market 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.

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