Looking For Growth? The Natural Foods Industry is on Sale!

The U.S. stock market has seemingly hit its stride over the last few weeks as both the Dow Jones Industrial Average and S&P 500 were sitting near new all-time highs before pulling back slightly in recent days. Despite a rocky beginning to 2014, the equity market is now set-up to potentially record another consecutive year of strong gains, with the S&P up around 5 percent through the middle of June. While the bull market in stocks remains intact, investors have been forced to become more discerning this year as correlations between different sectors and asset classes have fallen. Whereas risk assets rose in near lockstep throughout 2012 and 2013, this has not been the case through the first-half of 2014. Instead, individual stock picking is back en vogue and investors have become more selective in building their portfolios. The natural consequence of the bull run in stocks, however, is that valuations are starting to look rather rich and sentiment indicators also suggest that caution may be warranted. Given the current landscape, investors should be on the lookout for sectors and individual equities that can provide growth at a reasonable price. One area that would appear to fit this criteria rather nicely is the natural and organic food sector. While many stocks are trading at nosebleed valuations, most of the publicly traded natural foods companies have actually seen their valuations fall over the last year. Given that the industry is expected to grow 14 percent annually through 2018, this may be a great place to hunt for value. Below, Benzinga takes a closer look at five potentially compelling investment ideas in this fast-growing market sub-sector. Whole Foods WFM - The sell-off in the natural and organic food sector has been driven in large part by a pullback in industry leader Whole Foods. The stock has been a long-term outperformer, but the shares have been hit hard thus far in 2014. Year-to-date, WFM has lost around 28 percent and is currently trading 36 percent below its 52-week high. While some investors may be fearful of stepping into the stock during what has been a protracted decline, this may be a great opportunity to pick up a premier name at a discount. The most recent downside catalyst in the stock was the company's Q2 earnings report. Whole Foods missed Wall Street earnings estimates and also lowered its full-year outlook, resulting in a one-day plunge of almost 19 percent. Although the disappointment may have caught the Street off guard, Whole Foods' long-term fundamentals continue to appear very attractive. Revenue, net income, and margins have all shown amazingly consistent growth over the last five years and analysts are projecting this trend to continue in fiscal 2014 and 2015. Top-line growth is expected to be 10.60 percent this year followed by a roughly 12.60 percent gain in 2015. Similarly, earnings per share are estimated to be up 4 percent in 2014 and 13 percent next year. Between June 2013 and June 2014, Whole Foods' price/sales ratio has fallen from 1.53 to 1.15 and the stock is currently trading at a forward P/E of around 24. At the very least, this is a name that investors should have on their watch list. Look for this stock to hammer out a bottom in the coming weeks and once again begin its long-term upward trajectory. Natural Grocers by Vitamin Cottage NVGC - The first thing that jumps out about this specialty retailer of natural and organic groceries and supplements is its solid track record of top-line growth over the last 5 years. Revenue has climbed around 90 percent from $227 million in fiscal 2010 to approximately $431 million in fiscal 2013. Margins have also been ticking up in recent years and Natural Grocers has recorded three consecutive years of net income growth. Between fiscal 2012 and fiscal 2013, income rose by 59 percent to $10.55 million. Furthermore, Wall Street analysts are projecting that net income will jump another 28 percent to $13.49 million, or $0.60 per share. For fiscal 2015, Wall Street is estimating that the company's bottom line will rise by another 30 percent to $0.78 per share. Revenue is expected to be up 21.40 percent in fiscal 2014 followed by a roughly 21 percent boost in 2015. Meanwhile, the company's price/sales ratio has actually fallen from 1.83 to 1.2 between June 2013 and June 2014. The share price has also declined rather significantly, falling 21 percent over the last 52-weeks and a whopping 46 percent since the New Year. The catalyst for the sell-off was the company's Q1 earnings report, which triggered a massive one day decline of almost 37 percent on May 2. Despite the sagging share price, the stock may be presenting a compelling opportunity at current levels. Shares are trading at a forward P/E of roughly 29 and a PEG ratio of 1.29. While this is hardly inexpensive, it is reasonable considering the company's growth metrics. Wall Street analysts would seem to agree, as the consensus target price on the stock of $34.83 implies 52 percent upside from current levels. The Fresh Market TFM - Like its industry counterparts, The Fresh Market has been hit very hard over the course of the last year, with shares falling more than 31 percent. At current levels, the stock is trading roughly 38 percent below its 52-week high. Furthermore, TFM's price/sales ratio has fallen from 1.75 last June to 1.07 in recent days. The technical picture, however, does not entirely reflect the company's strong fundamentals. Consider, for example, that revenue has risen approximately 36 percent between fiscal 2011 and fiscal 2013. On a down note, however, net income declined by 21 percent last year. Looking ahead, analysts are projecting a better than 15 percent jump in top-line sales this year along with net income growth of 13 percent. In fiscal 2015, Wall Street is modeling revenue growth of just under 15 percent and a 17 percent gain in net income to $1.85 per share. In light of near-term headwinds, but strong long-term fundamentals, this stock may be undervalued at current levels. Shares are trading at a forward P/E of 19 and a PEG ratio of 1.32. This is below the average industry P/E and PEG ratio of 21 and 2.77, respectively. The consensus price target on the stock of $38.93 represents roughly 9 percent upside from current levels. Boulder Brands BDBD - Unlike the previous three companies, which operate natural and organic grocery stores, Boulder Brands distributes a collection of gluten-free and health and wellness products through retail channels. Among the company's brands are Smart Balance, Earth Balance, Bestlife, EVOL, Udi's, Glutino and Gluten-Free Pantry. Although Boulder Brands has seen a decline in its price/sales ratio over the last year, the share price has actually risen around 23 percent. Year-to-date, however, the stock has lost almost 7 percent. At current levels, the stock is trading around 20 percent below its all-time high, giving the company a market capitalization of $901 million. Like the majority of its industry counterparts, Boulder Brands has an enviable track record of revenue growth, with top-line sales rising 91 percent between fiscal 2010 and fiscal 2013. Nevertheless, operational headwinds have caused some volatility in net income during the same time frame. The next catalyst that investors will want to keep an eye on is the company's next quarterly earnings release which is scheduled for July 29 prior to the opening bell. Analysts are estimating that Boulder Brands will report earnings per share of $0.05 on a 17.70 percent boost in revenue to $130.29 million. A strong earnings release should help the stock to hone in on its 1-year consensus target price of $18.25, which represents a premium of better than 23 percent to current prices. Annie's BNNY - This organic food company has a lineup of over 125 products in three primary categories -- meals, snacks, and dressings. Annie's is in the sweet-spot for growth as it markets its branded line of organic food to health-conscious consumers who seek to avoid artificial flavors, synthetic colors and preservatives. Like the other companies covered here, Annie's is attractive because the stock has pulled back sharply despite strong fundamentals. Over the last year, the shares are down around 19 percent, including a roughly 24 percent loss in 2014. Over the course of the last 52-weeks Annie's has gone from trading at a 4.45 price/sales multiple to just 2.65 times sales. Shares currently trade at a forward P/E multiple of 29 and a PEG ratio of 1.46. Although these are not exactly cheap metrics, forward-looking growth estimates are very attractive. Wall Street is modeling sales growth of 18 percent in fiscal 2015 followed by 17 percent growth in 2016. Net income is expected to rise by a little less than 5 percent this year followed by a 26 percent jump next year. If the past is any predictor of future performance, Annie's should be able to meet or exceed these estimates as the company has been a particularly compelling top-line growth story in recent years. Although Annie's has had some trouble in boosting its net profit margins, the company has recorded revenue growth of 74 percent over the last four years. Additionally, net income has risen for the last three years. Going forward, this will be a company to watch in the fast-growing natural and organic food sector.