Right after its IPO, Annie's Inc. (NYSE:BNNY) landed on the watchlist for the real-money Prosocial Portfolio I manage for Fool.com. The organic and natural foods provider has many of the factors I look for in investments. Still, I had misgivings.

Recent developments have turned my concerns around. I've decided it's time to finally pull the trigger and buy shares of the organic food company for the Prosocial Portfolio. Ignore your first impression of Annie's -- macaroni and cheese. Its business fits the bill with its stakeholder-friendly design and the foundations for plenty of growth.

The business
The Berkeley, Calif.-based company has been around for 20 years. Annie Withey, the co-founder and of course, the Annie, remains involved in the business. The letters on the back of the boxes are actually written by Annie herself. 

Annie's public filings with the SEC, including its IPO prospectus, outline in detail the types of business advantages that fit perfectly into the Prosocial Portfolio theme. An increasing number of companies are gaining attention because they're proving that hardcore "profit over all" businesses aren't necessarily the most successful ones, and those are my favorite kinds.

The company formed "with the goal of giving families healthy and delicious macaroni and cheese and to show by example that a successful business can also be socially responsible" (emphasis mine).

In another snip from its SEC filings:

We are committed to operating in a socially responsible and environmentally sustainable manner, with an open and honest corporate culture. Our mission is to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet. Our corporate culture embodies these values and, as a result, we enjoy a highly motivated and skilled work force that is committed to our business and our mission. ... We believe our consumers connect with us because they love our products and relate to our values, resulting in loyal and trusting relationships. 

As much as I love that spirit, one of my major concerns about Annie's was the focus on the iconic organic macaroni and cheese. Increasing the array of Annie's products on grocers' shelves and compelling shoppers to buy beyond the mac and cheese was both a huge opportunity and a major challenge.

Why I'm buying
Given the need for more products in more channels, although the socially and environmentally conscious structure of the business excited me, the post-IPO price surge didn't. Although I'm often willing to buy premium-priced stocks like Whole Foods Market, Chipotle, and Starbucks, I will only do so when I believe in excellent businesses run by excellent managements positioned for amazing growth.

I simply wasn't sure about Annie's. The stock was trading at 33 times trailing earnings when I looked at it in April 2012, and I needed more indications it could tackle its challenges.

Right now, Annie's shares are trading at 33 times forward earnings. Over the course of several years, the company's been increasing revenue by about 20% annually. Its gross profit margin has been stable at around 38% to 39% for years, and unlike many newly public companies, it is profitable.

While analysts project 20% earnings growth in the fiscal year ended March 2015, signs of success in additional products lend the sense that it could generate more growth than currently expected.

Management revealed some heartening news to share in the conference call. Although traction in its grocery store channel still needs improvement, it's making progress with ancillary offerings. For example, frozen offerings are gaining, and management said Annie's pizza offering is doing well in the natural channel. 

It's also reported heartening trends when it comes to snacks, with a 20% increase in growth in overall grocery and 15% growth in the fruit snacks business. Annie's snacks include crackers, graham crackers, and granola. Meanwhile, touching on a fast-growing dietary restriction, Annie's released its gluten-free bars at the end of 2013, and management said these products are off to a good start. 

Another positive I like to take into account: Annie's has a strong balance sheet, with no debt.

The risks
Investors found Annie's unsatisfying because of a soft view going forward. The price of organic wheat is rising, and that was one of the drags. Management pointed out that farmers were holding organic wheat in their silos, so the shortage wasn't due to crop yield and supply. This won't abate overnight.

On a bigger level, supply of organic ingredients is a potentially daunting prospect. Organic ingredients still aren't plentiful, and growing demand translates into more competitors vying for the ingredients. Mother Nature can have a hand in crop yields, too, and sometimes not in a good way.

Speaking of competitors, Annie's has plenty, such as organic and natural kin Hain Celestial. (Given some similar product offerings, Hain Celestial is another Prosocial Portfolio stock.)

The organic area fits hand-in-glove with consumer health and sustainability trends, but popularity breeds big competition. Huge companies like Kellogg and PepsiCo are moving in, and let's not forget well-known names like Newman's Own and Amy's Kitchen.

The Foolish bottom line
I like the way Annie's basic mission fits into a positive, growth-oriented marketplace for the long term; this authenticity and sense of purpose appears to have been built into its DNA for decades. Stakeholder-friendly companies build positive foundations that provide economic success and fewer risks. Given trends embracing the kinds of products Annie's has been making all along, it's poised to take off.

Investors' current response to Annie's most recent quarter and outlook is short-term negativity. This kind of situation serves up the great opportunities investors wait for, and that's where Annie's stands right now.

Rock-solid companies
The greatest companies are the ones that are strong enough for long-term buy-and-hold investing. Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has allowed us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Alyce Lomax owns shares of Chipotle Mexican Grill, Starbucks, and Whole Foods Market. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Hain Celestial, PepsiCo, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers