Whether you want a feel-good investment or are seeing a trend, organic food investing might be an area of budding growth for years to come.
"The overall food market grows at about 3 percent per year. The organic food market grows at about 15 percent per year, and it's exclusively driven by consumer interest in healthy foods," says Kevin Egolf, chief financial officer for Iroquois Valley Farms. "They make healthy food choices for a variety of reasons. Some are avoiding GMOs (genetically modified organisms), some want a more localized food supply, some want to avoid the applications of chemical pesticides and herbicides, and others for environmental reasons."
If the U.S. follows Europe and strengthens food and GMO regulations, organics might gain even more strength.
"Europeans are already there; they don't allow GMO products and put huge limits on pesticides and fungicides," says Josh Strauss, co-chief executive officer of Pekin Singer Strauss Asset Management in Chicago. "And I think that as we learn more about food and its impact on health, we're going to move more and more in that direction."
Here are a few green investments to keep on your radar.
Sprouts Farmers Market (ticker: SFM). Deutsche Bank calls SFM stock "one of the best growth stories in retail" and has raised its price target from $32 to $35. Sprouts Farmers Market has increased average weekly sales by 21 percent in the last three years, and has a compound annual growth rate of 6.7 percent. Average annual per-store sales are $17 million, and the company believes it can increase this to $20 million over the next four to five years, according to the report.
Hain Celestial Group (HAIN) and WhiteWave Foods Co. (WWAV). Hain Celestial's brands include Earth's Best, FreeBird, Hain Pure Foods, Health Valley, Rosetto and Spectrum Essentials, and WhiteWave makes Horizon Organic and Silk. Both companies are recommended by Palash Misra, a director at Stax, a strategy consulting firm in Boston.
"Retailers from Whole Foods (WFM) to Kroger (KR) to Target (TGT) are all increasing shelf space allocated to these brands," Misra says. "Additionally, both of these companies are owners of strong household names and some of the most popular organic brands on the market. The chance of them getting easily replaced by a substitute or competing brand appears low."
United Natural Foods (UNFI). United Natural Foods is a leading food distribution company of natural and organic foods, supplying stores such as Whole Foods Market, Sprouts and Roundy's Supermarkets.
Recently battered by the loss of the Albertson's supermarket chain as a client, the sluggishness of Whole Foods sales (which accounts for 35 percent of its sales) the dip in commodities and the slow economy, UNFI stock hit a 15-year low in February, but then gained 20 percent to trade in the high $30s.
Strauss expects large returns from this stock after July. "This is a stock you buy, and five years later you turn around and you've got a triple on your hands," he says.
Historically, UNFI has shown double-digit returns on capital and high growth rates, Strauss says, and two top executives increased their holdings last year by buying $500,000 in stock when it was in the mid-$40s. Such optimism from C-suite executives is seen as a positive harbinger for company stock.
"I think the stock's worth somewhere between $60 and $70 a share today," Strauss says.
Its main competitor is the privately owned KeHE Distributors, which nabbed its Albertson's business. But it is uncertain whether KeHE can keep providing lower prices. "KeHE's debt was downgraded by Moody's very recently because there's a strong possibility that KeHE's really taking it on the chin to get this business back," Strauss says.
Iroquois Valley Farms. This private farmland finance company in Illinois buys farmland across the country and leases it to organic farmers. "Our investors own a piece of the company, which owns a diversified portfolio of 30 different organic farms across the United States," says Egolf, who has a background in private equity.
The company supports the mission of organic farmers seeking long-term land security. Accredited investors buy into the company with an equity stake and sell back at the end of their investment horizon (after at least seven years) for the current land value.
"Historically, our share price has increased 12 percent per year since 2007," Egolf says. The company works with direct funders, financial advisors and individual retirement accounts. The company started with 142 acres in 2007 and now has more than 2,600 of land that is either organic, or going through the three-year certification process to become organic.
