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How Healthy Are Organic Food Stocks?

February 4, 2016, 4:42 pm

According to the Centers for Disease Control (CDC), a full two-thirds of U.S. citizens are overweight or obese. So it should be no surprise that healthy eating has become one of the biggest trends driving the food business. Companies and restaurants left and right are announcing shifts toward organic food, like Chipotle Mexican Grill (CMG) touting GMO-free ingredients or McDonald’s (MCD) banning human antibiotics from its chicken. There’s been a 3,400% increase in sales in 24 years, making organic food the fastest-growing consumer food and lifestyle trend in modern history. Plus, organic food consumption is expected to grow at an annual rate of 14% through 2018—meaning there’s still time to take advantage of health-minded consumerism if you know which names to look out for (and which to avoid).

Whole Foods Market (WFM) is probably the most well-known organic food provider — its shelves are lined with unique products like asparagus-infused water and kale ice cream. But despite the store’s popularity among Millennials and reputation as a “luxury organic” food stop, the stock has been weak over the past year. In recent months, the chain has suffered from increased competition as traditional supermarkets began offering organic produce at more reasonable prices. Produce was Whole Foods’ primary means of attracting customers in order to upsell more expensive products, and so the company responded by lowering the price of its organic produce.

Nonetheless, comparable same-store sales were flat last quarter, and earnings declined in the company’s fiscal 2016 first quarter to $0.24 a share. WFM also saw a large decline in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)—almost a $100 million slide.

The bull case for WFM is that margins could be bottoming out and the company is ready to return to growth, although perhaps not at its previous rate. Future profitability is a bit hazy at this point, but if management can close the 30% gap between its prices and the prices of its competitors, the stock can remain one of the better pure play options.

Hain (HAIN), the parent company for some of the most popular organic brands, reported earnings on Monday. The stock immediately plunged almost 10% as growth numbers had slowed considerably, but share prices quickly snapped back and have been riding a clear upward trend since then.

Management blamed inventory de-stocking and the initiation of a “clean floor plan” at Wal-Mart (WMT) for weak sales in the U.S., stating that sales were up 3% without those factors. But with competition intensifying and the company’s growth weakening, I don’t predict HAIN will return to the $69 share price we saw as recently as August any time soon. The stock has decent potential in the long term, but I think there are better places for fresh money in the sector.

Focusing on the long term is a good tactic for maneuvering the organic food group because healthy eating isn’t a fad that’ll dissipate a few months down the line. If anything, demand will strengthen over time as the consumer base continues to grow and organic products become cheaper. Position yourself in the right growth stocks from now, and you’re sure to see some nice returns as those organic, all-natural, GMO-free products permeate the mainstream food industry.

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