How to Invest in Organic's Fertile Growth

Famed growth investor T. Rowe Price often spoke of finding stocks in "the fertile fields of growth" and holding them for a long time. Organic food is one such field that lends itself to punning quite nicely, and rapid growth should have investors ready to pick some winners.

In its 2011 Industry Survey, the Organic Trade Association noted that organic food sales grew 7.7% in 2010, down significantly from the previous high of 21.1% in 2006, but an improvement over 2009's 5.1% growth. Organic food sales have grown about 13.4% annually for the last nine years, while conventional food sales have remained largely flat. Even during the recession, when you would expect trade-downs to occur, organic sales have still outperformed cheaper conventional alternatives.

Hard soil to plant in
Impressive growth is all well and good, but unless you own some farmland it might be difficult for you to take advantage of this trend. The most direct way to invest in organic food would be to buy shares of the farms or the manufacturers producing it. Unfortunately, they are mostly unavailable to ordinary investors. Most are privately owned, run by co-ops, or are a drop in the bucket of some much larger corporation.

Horizon Organic, the largest supplier of organic milk in North America, is owned by Dean Foods (NYSE: DF  ) , for example. It is bundled into the company's WhiteWave-Alpro segment, along with a number of other large organic brands. While this is the company's fastest-growing segment, it represents only 16% of sales. Similarly, Dole Food Co. (NYSE: DOLE  ) , one of the world's largest producers of bananas, claims to be focusing on higher-margin organic bananas, but these are buried in the banana division of the fresh fruit operating segment. Some other brands, like Organic Valley, are actually cooperatives of organic farmers across the United States.

There are a few manufacturers that are close proxies for a pure-organic play. The Hain Celestial Group (Nasdaq: HAIN  ) sells conventional products alongside organic, but focuses on specialty and "natural" foods. Natural foods have no legal definition, but Hain's natural foods are minimally processed and include no artificial ingredients. While not technically all-organic, Hain's products tap into the same sort of customer demographic and broader sales trends. Hain's revenue growth has averaged 8.6% for the last 10 years, not quite as high as industrywide organic food growth, but still far outpacing conventional foods' flat growth.

Venturing downstream
A different way to get exposure to organic's growth is to invest in those companies that help facilitate it. Whole Foods (Nasdaq: WFM  ) is one obvious example. Over the last 10 years, revenues have grown 17% annually, while competitors Safeway (NYSE: SWY  ) and SUPERVALU (NYSE: SVU  ) have averaged 2.5% and 5%, respectively. Even during the last few years, which have been very difficult for many families, Whole Foods' sales growth has remained stable, while more bargain-oriented competitors have been flat to negative.

Going further downstream, there's United Natural Foods (Nasdaq: UNFI  ) , which is the leading independent distributor of organic and natural foods in the United States and Canada, and happens to be the primary distributor to Whole Foods. United has seen similarly steady revenue growth of 14% over the last 10 years.

Unfortunately, United operates in a very low-margin business, and most of the company's sales growth has come from big deals like that with Whole Foods, which get volume discounts. As a result, United expects margins to narrow even further but hopes this will be offset by efficiencies gained from its significant infrastructure investments.

Still just a sapling
Despite its rapid growth compared to conventional food, organic food still represents only 4% of total food sales, leaving it a lot of room to grow. As more consumers become health-conscious, organic should continue to outpace conventional food, and serve as a strong growth driver for companies focusing in this area.

Fool contributor Jacob Roche holds no position in any of the stocks mentioned, but sure wishes there were a Whole Foods closer to him. Whole Foods Market is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended buying calls on SUPERVALU. The Fool owns shares of Dean Foods and SUPERVALU. 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.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 21, 2011, at 5:54 PM, GuardianFSG wrote:

    Great post Jacob.

    Market leaders like Whole Foods Market (WFM), First Solar (FSLR), United Natural Foods (UNFI), and WaterFurnace Renewable Energy (WFIFF) started as tiny, green stocks.

    The organics sector is experiencing steady growth, and there are numerous small emerging companies out there who are providing innovative products and solutions.

    Investing in them is a way to support them and help them grow, plus it expands awareness which should result in an increased shareholder base and value.

    We have done a lot of research in this area. In a recent post we shared some of our resources and also profiled a company for our readers.

    If we may...the entire story and full disclaimer can be read at:

    http://guardian-fsg.com/blog/2011/05/18/emerging-green-stock...

    Hope you will continue to discuss this sector with Fool members.

    Best,

    Lisa

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