The Freshest IPO of the Year

This article is part of our Rising Star Portfolios Series.

I generally like investing in IPOs about as much as I like trying to figure out what health-care plan to go with: You never really know what you are getting. There sure was a lot of hype with General Motors' do-over, but I still have my doubts about that one. I gotta say, though, The Fresh Market's (Nasdaq: TFM) recent IPO has got me interested, in part because of my shopping experiences there when I was in college. And while that was a few years ago, that alone makes me interested in the stock.

A fresh opportunity?
In a land where Whole Foods (Nasdaq: WFMI) rules, it is nice to see another opportunity in the specialty grocer space. While Whole Foods and The Fresh Market do have their differences, they cater to the market looking for something special. Something different. Something, dare I say ... fresh?

The Fresh Market was founded back in 1982 in Greensboro, N.C., by Ray and Beverly Berry, with a simple idea: to create a truly sensory grocery shopping experience, similar to European-style markets, with a focus on superior service and quality -- and that's still the focus today. Wide aisles and an "open air feel" store with old-style butcher shops and delicatessens add to the experience, keeping customers coming back for more.

Getting fresh
The argument for the IPO is pretty simple: The Fresh Market is just getting started. The Berrys have gone from the one-store operation in Greensboro to 100 stores in 20 states, and they see a market that can ultimately support up to at least 500 stores. Given that half of the current stores are located in Florida, North Carolina, and Georgia, there is plenty of space out there to make their mark.

As a grocer, The Fresh Market faces a slew of competition, from international behemoth Wal-Mart (NYSE: WMT) to national chains like Kroger (NYSE: KR). But to be fair, it isn't necessarily targeting that particular shopper. Perhaps one of the most overlooked and possibly unknown competitors is privately held Trader Joe's. Trader Joe's has 344 stores open in 25 states and Washington, D.C., and sells more than twice as much per square foot as Whole Foods:

Long-lasting freshness
The most enticing aspect of The Fresh Market (for investors at least) is the potential for growth. Revenue in 2007 was $728 million, growing to $941 million over the last 12 months, while operating margins have averaged close to 6% over this same period. And if the company is only at about 20% of maximum store count as management says, there could be a long tail of additional stores which could really juice top-line revenue for some time to come.

Competition can keep things fresh
There is already a lot of competition in this space, and The Fresh Market has its work cut out. In many cases, though, this can be a matter of geography. And if The Fresh Market can place stores in areas where there is no real alternative, I think there's room to peacefully coexist. Take Peachtree City, Ga., for example, where The Fresh Market has a store opening up, slated for sometime in 2011. The closest Whole Foods in that area is almost 30 miles away, and the same goes for Trader Joe's.

As is common with many IPOs, it looks as if The Fresh Market's stock is priced for perfection. The initial offering price of $22 looks like a steal at this point since shares recently traded around $36.That's about 45 times trailing earnings and 25 times free cash flow. Simply put, it looks as if the market expects big things, and I do, too. But the cheapskate in me is telling me to wait for a better price because I know it'll happen at some point.

The fresh bottom line
I was initially a little surprised to see The Fresh Market going public, as I didn't realize they had such plans for growth. But I think that more and more consumers are looking for this kind of shopping experience. My bet is that down the road we are going to see The Fresh Market as a much bigger company than it is today. Agree? Don't agree? Swing on by my Rising Stars discussion board and lemme know what you think. You can also follow me on Twitter.

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