How To Ride the Organic & Natural Products Wave

By Aaron Levitt | May 06, 2014 AAA

The recent decision by Bentonville, Ark.-based Wal-Mart Stores, Inc. (NYSE:WMT) to begin offering organic products at a significant discount highlights a compelling consumer trend: people are shopping healthier. From organic food to more natural personal care and household items, interest in these items is exploding.

And in that trend investors can find plenty of opportunity. Companies manufacturing and selling these products could be great long term buys as the trend towards healthier lifestyles continues. For investors, the time to get healthy is now.

Torrid Growth

While there is certainly a segment of the American consumer that is struggling, many are actually moving up the “food chain” and have resumed spending on organic and natural items. Before the Great Recession, many brands begun offering natural choices only to pull or discontinue them as consumers scaled back their spending. Rising wages, job growth as well as an aging population concerned about their health have once again made organic products an attractive play.

According to data from Reuters, more than 58% consumers will now choose organic fruit over non-organic, while 81% of families choose an organic option across all categories most of time while grocery shopping. Overall, sales of organic food have risen 43% over the last five years. That contrasts to just a 14% rise in overall grocery sales. Leading the way has been Millennials, who are are more likely to buy sustainable products.

Growth in organic and natural products is set to rise higher still over the longer term. According to projections created by industry group the Organic Trade Association (OTA), sales of organic foods are projected to have a compound annual growth rate (CAGR) of about 14% between 2014 and 2018. Adding in “natural” foods, which are defined as those that undergo minimal processing and contain no additives such as preservatives or artificial coloring, and that CAGR jumps to nearly 16%. Considering that organic foods account for about 4% of America’s grocery budget, there is plenty of room for the trend to accelerate.   

Filling Your Basket

Given the torrid and continued growth of organic and natural products, investors may want to hop on board for the long haul. Some consumer discretionary funds, such as the broad-based Consumer Discretionary Select Sector SPDR (NYSE Arca:XLY), do include exposure to some organic names including Austin, Texas-based Whole Foods Market, Inc. (Nasdaq:WFM). However, for investors looking for real exposure it means a dose of individual picks.

There are smaller grocery store chains focused on the natural-food space. Chief among them is Greensboro, N.C.-based The Fresh Market, Inc. (Nasdaq:TFM). TFM operates 151 stores in 26 states. That smaller footprint and focus on affluent areas has helped TFM see continued profit and revenue growth. Analysts expect the firm to grow its revenue by 15.1% and earnings by 13.6% this year. That’s better than WFM and smaller competitors such as Sprouts Farmers Market, Inc. (Nasdaq:SFM) and Natural Grocers by Vitamin Cottage, Inc. (Nasdaq:NGVC). The Fresh Market is cheaper too on a P/E-basis. Organic foods distributor United Natural Foods, Inc. (Nasdaq:UNFI) is also worth a look.

Aside from the purveyors of natural foods, the companies that actually produce them could be great buys as well. The best bet could be Lake Success, N.Y.-based Hain Celestial Group, Inc. (Nasdaq:HAIN). The firm owns several well-known and popular organic brands, including Celestial Seasonings teas and Earth's Best, and continues to build its brand empire. The latest are the addition of gluten-free bakery Rudi’s Organic and U.K.-based rice business Tilda. Although not super cheap at a forward P/E of 23, HAIN is priced for perfection given its growth prospects and brand leadership.

Likewise, snack-cracker and organic kid’s food-focused Annie's Inc. (NYSE:BNNY) could be a buy. The Berkeley, Calif., company has been focusing on its core product line and getting those products onto more shelves. Recent deals include product-placement agreements with retailer Target Corp. (NYSE:TGT).   

The Bottom Line

Consumers are shopping healthier. The trend towards growing organic and natural products sales is only building momentum. That means the purveyors of natural foods could be great long term buys for investors.

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