“How to Double Your Money on ‘The Next Whole Foods'”

Sniffing out the rapidly expanding natural food chain touted by Keith Fitz-Gerald

By Travis Johnson, Stock Gumshoe, April 9, 2013

Today’s tease comes in for the Money Map Report, in some articles where they hint around about the best way to double your money on the stock they think can be the “Next Whole Foods.” The pick is by Keith Fitz-Gerald, but We get a bit of an introduction from Steve Christ in a free article lead-in to the ad:

“There’s an incredible new trend brewing right now. And it’s incredibly profitable too…

“… this particular industry has grown from “only” $3.6 billion a year in 1997 to more than $31.5 billion today.

“That’s especially impressive when you consider that this growth – all 775% of it – occurred during the greatest sustained economic downturn since the Great Depression.

“You see, the industry – and a company that just went public in July – is set up to benefit from an extreme cultural shift that’s gaining speed and strength every day.

“I’m talking about the movement towards ‘real’ food-not ‘fake.'”

And this …

“Whole Foods has plans to nearly triple … to about 1,000 stores by moving into suburban and other underserved markets.

“According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, that’s just a sign of what’s to come in the organic food industry.

“‘People are becoming acutely aware of what they put in their bodies’ Keith said, ‘and they don’t want it to be genetically modified, full of high-fructose corn syrup, or created with chemicals, herbicides, preservatives, and growth hormones.'”

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Well … not everyone is becoming acutely aware. Coca Cola still sells more than one serving of their products (mostly Coke and Diet Coke) per person, per day in the United States, and we are notoriously eager to try every new processed convenience food — from the frozen peanut butter and jelly sandwich (the absurd Uncrustables are 15 years old this year!) to the pressurized can of pancake batter.

But yes, I agree this is a trend that’s not likely to crest anytime soon — more organic, more natural, hopefully less processed (though I’m a sucker for organic and natural convenience foods myself).

So how do we play that trend as an investment? Well, there’s always Whole Foods (WFM), of course, a stock I like but have never owned (I can’t seem to get the timing right on that one — when it has dipped or seen lower prices, I wasn’t paying attention to it … though it’s actually looking pretty good to me again lately, I’m in the process of taking a closer look).

But Whole Foods is already pretty big. Not huge — larger grocery chains like Kroger and Supervalu have close to 2,500 stores each, Safeway comes in close at about 1,500, Whole Foods has about 350 stores, with ambitions to continue increasing that store count by 5-10% per year and an assertion that they can easily reach 1,000 stores in the United States without saturating the market.

And Whole Foods has been a remarkable growth engine for investors for many years — since well before it was touted as the “New American Super Brand” by the Motley Fool brothers in the early days of Stock Gumshoe (that was six years ago — though they still own it and tease it now and again), but when you’ve got a big growth company that looks a little bit expensive, with fears that the growth may be petering out or cresting, you can bet that someone will try to sell you on the idea that there’s an up-and-comer ready to eat their lunch.

So that’s what we’ve got today — Keith Fitz-Gerald thinks he’s found the “next Whole Foods.” Here’s how he hints around about this one in the attempt to get you to subscribe to the Money Map Report for the full story:

“As Whole Foods becomes referred to as ‘Whole Paychecks’ among more and more shoppers, consumers will look elsewhere for cheaper organic products.

“That’s where this company has a competitive advantage with its much smaller stores. As a result, they are able to offer prices 8%-10% lower than Whole Foods.

“What’s more, the company offers entirely organic and natural products, whereas Whole Foods offers a combination of organic and non-organic products.

“You may not think this is a big deal, but there’s a hidden benefit since it means shoppers don’t have to waste their time reading labels. They can rest assured that every last item has been pre-screened before it hits the shelves.

“… here’s where the payoff really is for investors: the company used the $54 million it raised in its share offering to pay off debt and can now fund its expansion with a clean slate. Very few companies have this luxury….

“… the company plans to expand its store count by 20% a year.

“And with just 60 stores currently in operation and the prospect of 1,000 stores in the future, that’s practically like buying Whole Foods at the beginning of its run.

“Since the company’s stock began trading publicly in July 2012, shares have gained 34.36%. Says Keith: ‘I don’t expect the price to stay so low for long.'”

And the note also adds that this pick was recommended in the Money Map Report in their December issue … which would mean they’re already doing pretty well. The pick being teased is Natural Grocers by Vitamin Cottage (NGVC), and the shares were mostly around $20 in December and they’ve recently been on a spike up to around $24 — though this is a new and pretty thinly-traded small stock, with a market cap of only about $500 million, so it’s been a very bumpy ride since the IPO, with quite a few weeks when the stock was up or down 10%.

The stock is not obviously cheap, and it’s pretty heavily shorted, but it’s not wildly out of line with the valuation of Whole Foods or the other specialty grocery chains. There aren’t that many really comparable publicly traded stocks — there’s The Fresh Market (TFM), which is more of a gourmet shop chain but also appeals to a similar demographic, but really the main competition for Natural Grocers is Whole Foods and Trader Joe’s (still privately held) and your local small natural grocery store or regional chain.

So how do they stack up? Here’s a wee bit of a chart for you:

Whole Foods Natural Grocers
Price/Sales 1.28 1.5
Forward Price/Earnings (estimated) 25 40
Expected Annual Earnings Growth (next five years) 19% 26.5%
PEG Ratio 1.55 1.73
Store Count 344 59
Market Capitalization $15.5 billion $550 million

These companies are not all that comparable on meany measures — the average Natural Grocers shop is about 10,000 square feet, similar to Trader Joe’s and of necessity pretty limited in scope, and the average Whole Foods is 38,000 square feet, much more like a smaller traditional supermarket. Natural Grocers does indeed focus on being more restrictive than Whole Foods, refusing to sell any non-organic produce, but both have restrictions on what they sell (no artificial flavors or colors, no bleached flour, lots of forbidden chemical ingredients) — the spiel is that Natural Grocers is so much more careful that you don’t have to check to see if the produce is organic or read the label, they only sell the good stuff. They also don’t offer prepared foods or the big variety of meats that Whole Foods does — which is probably part of the reason (along with economies of scale) that WFM can squeeze out a larger profit margin (4% vs. 2% as of last year).

Will that mean they can take market share away from Whole Foods? Or expand quickly enough to build businesses in smaller areas before Whole Foods can establish a presence? Well, maybe, though I suspect that they’re more likely to supplement and coexist with Whole Foods (much as Trader Joe’s does) in many markets, and in smaller markets they’d be more likely to hurt the small local natural foods shops and coops. I expect we’ll find that this trend toward more natural and organic food is large enough to support a lot of businesses — and clearly, there are a large number of traditional supermarkets (not all) that just can’t or don’t provide the ethical, health or wellness products (and reassurance, and vibe) that many shoppers want.

It’s an interesting business, with a strong social trend backing them up and a pretty rapid growth plan — but when I browse through the numbers I feel a bit more comfortable with Whole Foods. That’s mostly because they’ve built an incredible national brand and have had very solid growth over a long period of time (though sales did decline during the last recession before bouncing back up), and they’ve proven that they can gobble up any competitors who are worth eating — like the last natural foods darling to come out of Colorado, Wild Oats Markets, which they bought a few years back. NGVC is just so very, very tiny with only 60 stores that it seems likely they’ll make expansion mistakes that would really hit their bottom line — or simply be more expensive than expected. Whole Foods also carries no debt, and they have a small but rising dividend of 1% (and one that they can easily afford to grow even as they invest in significant store growth over the next two years, it’s only about a 30% payout ratio right now).

Whole Foods is also clearly tracking the urban and suburban success of Trader Joe’s and other small specialty and natural foods stores, and they’re being flexible with their expansion — I doubt they’ll open many 10,000 square foot stores, but they are going smaller for some locales where a 40,000 square foot natural supermarket just can’t sell enough to survive.

Perhaps my initial reaction that I’m more comfortable with the big guy than with the upstart is because I don’t know NGVC at all, and I think investors are generally too eager to jump on the “up and coming” pick and to underestimate the huge power of a large store count and an established brand. In truth, the expanding natural foods business is probably going to help all of these companies — and having a huge player like Whole Foods preaching the gospel and creating a national market and demand should also help to drive acceptance of more niche products and drive down prices of natural foods as consumption increases.

I’ve never been in a Natural Grocers, and I shop at Whole Foods with some regularity — Natural Grocers started in Colorado and is mostly spread across the Western half of the country, so although they had a pretty good IPO and their stock is doing quite well right now, it may also be that they won’t get the full measure of respect from Wall Street analysts until they have a store in Westchester, NY or Greenwich, CT. And I probably won’t make my way into one of their stores until they hit Massachusetts. Both companies have strong leadership teams, with John Macke at Whole Foods always ruffling a few feathers somewhere and with the founding family of Natural Grocers still calling the shots.

So what do you think? Interested in picking up some natural foods shares (and you can throw in suppliers like Hain Celestial (HAIN) or Annie’s (BNNY) to the mix if you like)? Have a preference for the more rapid growth of the new guys at NGVC (that’s not fair — the company’s actually older, only their big expansion is new) or for the much larger, slower growing and perhaps yuppie-tainted and less-organic Whole Foods? Let us know with a comment below.


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Kumar
Kumar
Member
April 10, 2013 1:42 pm

How long before Amazon moves into this space?
Likely if their same day delivery thing clicks.
Wonder if the existing organic B&M players esp. smaller ones like NGVC will be able to survive between such a predatory merchant and the Whole Foods gorilla.

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Bob
Bob
Guest
April 10, 2013 1:47 pm

GMOs: Poison, poison, poison. Did I mention it will kill ya? Run as fast as you can from any investment that is even remotely connected to GMOs (also called GE foods), and into the arms of anything that says no to GMO. Once the lawsuits start–Americans aren’t going to put up with crap like this latest Monsanto Protection Act–they will bring this house of cards down like the vulture it is. Love those mixed metaphors, especially when bearing down on reptilians, lol.

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april39
Member
April 10, 2013 5:42 pm

I own 15000 shares of Geely Motors GELYF the Chinese Company that bought Volvo when Ford was throwing the babies out with the bathwater. My 1st buyin was on the rumor: 5000@$0.11 then 10.000 on the news @$ 0.19 and another 5000 for my wife @0.41 Thus we owned 20.000 shares @ $4500 or $0.225/share [call it $ 0.23 w/commission] Getting antsy about my shorting losses I Sold 5000 @ $ 0.60 last year. The stock is now around $0.45 and I have not a clue as to who is making what on a very good car. As a new irregular with the better brother in Vermont summers and raising cows in Sharon MA on Pa’s old farm,whorehouse and distillery [until F.D.R. spoiled the business in 1933 I’d love you even more as an Irregular Uncle John A. calargy.com

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trainwreck
trainwreck
Guest
April 11, 2013 4:57 pm

I have been growing organic veggies and herbs with a daughter and son-in-law for 8 years. We are certified annually which requires stringent practices and record keeping and some money. If you want to guarantee that you are buying all organic, know your producer and visit his-her- theirs place of operation and buy direct. True organic and claimed organic are not always the same. Local and fresh includes more than organic producers. Grown organically doesn’t necessarily mean organic. I don’t know how any store can acquire enough truly organic produce to sell in quantity, without industrial farming production and long distance delivery. True fresh and organic can be had at farmers markets from certified producers, also from organic COOPS. After that I don’t bet on it.

Thomas J. Bates
Thomas J. Bates
Guest
May 13, 2013 3:05 pm

This is a comment on stores, not stocks.
I have been in Whole Foods multiple times but only bought there once, eating from the pound per item buffet for lunch with my daughter who likes Whole Foods. WAY OVERPRICED. But some people will overpay and so it seems to do well.
I like Trader Joes and would have bought their stock years ago…if it had been publicly available–but it wasn’t. Some things are expensive but many reasonable–even Two Buck Chuck wine, now $3.49? is a great buy.
QUESTION–what do you think about Fairway (recent IPO, I would have bought at IPO price if I 1) knew it and 2) could have gotten shares. I’ve known Fairway for 25 years since they had their first store on 73rd and Broadway in NYC. They are expanding fairly aggressively now and the new store’s I’ve seen seem to be doing pretty well. I would shop there and Trader Joe’s but not Whole Foods.

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Walt
Irregular
May 14, 2013 11:39 pm

I spent 12 years in the natural foods industry, including four years owning my own store. I worked for Vitamin Cottage (Natural Grocers) at one point and I personally know, or knew, the Isleys, including the original founders. These people worked 16 hours a day for years to get where they are now, and I guarantee you there is no one in the business as knowledgable as they are. Their business model is simply brilliant and they know and have always known how to make money. They are NOT intimidated by anyone in the industry, be it Safeway, Whole Foods or whoever. Check out their recent financials here http://tinyurl.com/aklx3nz and note that the stock went up $4 to $29.50 May 9-10 on these results. One of their key strategies is extremely aggressive pricing. They know how to buy and they pass on the savings, and they know that this is a big advantage over Whole Foods and their customers have known this for years. I love WF as well, but NGVC are masters in the industry and will be the last ones standing. Most, if not all of their stores are clean, well stocked and very very busy. Ignore the negative comments you see above because those people don’t know what they’re talking about.

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jabcom
jabcom
Member
June 22, 2013 11:50 am

There is another alternative to healthy shopping in the Southwest called Sprouts Farmers Market. It is a cross between Trader Joe’s and Whole Foods, and I shop there regularly now that 2 of them have opened within 10 miles of where I live. They have large organic selections and are less expensive than Whole Foods. There was talk of then going public— they are currently owned by Apollo Global Management, one of those Business Development Companies. They have 157 stores as of May 2013. Last year, I got my entire Thanksgiving dinner at Sprouts.

Penny
Penny
Irregular
June 23, 2013 12:22 am

I too can endorse Sprouts. The store I go to (Arvada CO) was formerly a Sunflower Market store until Sprouts bought out Sunflower. Like Sunflower, Sprouts has great deals on fresh fruit & veg, as well as a good range of organic and vegetarian items. I particularly use them to buy box-lots of produce for canning. They have a good bulk foods section; their meat prices are fair and the selection good. I’ve bought kangaroo meat there, if you’re interested.
With this article you’ve whetted my interest in Vitamin Cottage/Natural Grocers, but I just can’t see them as the next Whole Foods. I’ll try them out though, and think deeply about VCNG stock.

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