In this segment from Industry Focus, the cast introduces listeners to Calavo Growers (NASDAQ:CVGW), a California-based distributor of avocados and fresh packaged foods.

Find out how this dividend-paying, small-cap company is taking over an expanding market position in the global avocado market.

A full transcript follows the video.

This video was recorded on July 24, 2018.

Vincent Shen: We're going to take a brief look first at Calavo Growers, ticker CVGW. This is a $1.7 billion market cap company that started off as a farming co-op, converted to a corporation, has been operating as one since 2001.

Calavo's primary business and claim to fame is as a distributor of avocados, though it also deals with other fresh products like tomatoes and papayas. It's also branched out into some newer businesses like fresh packaged foods, which is pretty important.

Asit, this is a small-cap stock. It's not exactly one I expect to make the front page of The Wall Street Journal very often. I'm curious, how did this company end up on your radar?

Asit Sharma: We had an episode on screening for stocks last year. I was looking for small-cap consumer goods companies. I think I set a target revenue growth rate, and that's how this company popped up on my screen. You say "Calavo", I say "Calavo", I'm not sure how it's pronounced.

I was interested because Calavo Growers is in a very expanding market, the global market for avocados. It's such a nutrient-dense, rich food with many health benefits. The market is growing around a 6% annual growth rate per year. It's about a $13 billion market. So, I thought this might be an interesting niche company to follow, and I started writing about it. I've since been checking on earnings every quarter.

It has pretty decent earnings. The company nets about 4% on its profit margin. It has about $1.1 billion in trailing 12-month revenues. It's a smaller company. The market capitalization is roughly $1.6 billion. I like these little out-of-the-way companies that dominate a market.

The last thing I'll say about Calavo before flipping it back to you is, this company based in California gets its avocados primarily from [...] growers, as you mentioned, in California. Also imports from Mexico. The latest stats I have for the California crop, these are from 2016, this company had nearly 30% share of the entire California crop. It dominates in its niche. Fascinating, small concern to follow.

Shen: This discussion is definitely similar to the conversation that we had about Funko not too long ago. It's cool with this business, the company separates their overall business into three operating segments. They have Fresh Products, Calavo Foods, and Renaissance Food Group. The last one was an acquisition from 2011. Fresh Products and Renaissance make up over 90% of Calavo's annual revenue, which cleared that $1 billion milestone you mentioned for the first time in fiscal 2017.

I think Renaissance in particular has become a highlight for shareholders, given its long growth streak. It had 25 quarters of double-digit growth year over year through fiscal 2017. That has helped the segment to grow. Now, it contributes over 40% of the top line.

Another important role Renaissance plays is to stabilize the company's results. Avocado consumption has definitely been trending upwards pretty consistently for years at this point. U.S. avocado consumption hit 7.1 pounds per person in 2017. Supply and pricing, as you can imagine, are very much affected by the annual crop and the different regions it gets its crop from -- California, Mexico, also some places like Peru. Things like seasonality and input supply come up a lot for the companies that we discuss, but for a company that has over half of its business directly tied to fresh produce, this seems like one of the biggest risk factors for investors to consider. In their results, they've talked about how wildfires, droughts, and some of these things can affect the pricing and the supply that they have for what is a very strong growing demand for this staple product of theirs.

Sharma: If you decide to follow this stock, listeners, or perhaps invest in it, you should know that the avocado crop is an on-year, off-year crop. One year, low growth, then a bumper crop the next year. We're on an on year in 2018. Industry experts were looking at a very large volume of avocados. Just recently -- this goes back to some of the risk factors perhaps tied to global warming -- they had record heat out in California, 115 degrees in avocado-growing regions. That's taken a little bit of edge off of what would have been a very productive year.

The last thing I want to say about Calavo is, it has this 43% interest, which Vince talked about, in a company called FreshRealm LLC. It's a very tiny company which makes fresh foods and meal kits. They struck a deal with Weight Watchers International. Vince introduced listeners to Weight Watchers late last year, and we've also talked about on this show what a great run that's had with the Oprah endorsement. Calavo, through FreshRealm, has struck a deal with Kroger company. So, their meal kits will soon be in Kroger stores.

The volume of revenue from this subsidiary is really tiny. It's a small company to begin with. This revenue that they received from their subsidiary grew tenfold in the last quarter. Their interest with 106,000. That sounds like peanuts for a publicly traded company, and it is. However, the long-term potential in the meal kit business for a small player that's not trying to take over the market like a HelloFresh or Blue Apron might, there's potential there, unchallenged potential, in some cases.

This small company has signed some deals with other retailers, which will be disclosed in the back half of the year. We don't know which names they are yet. But, I'm intrigued by the small ownership stake in FreshRealm.

Shen: The last thing I'll end on is, I was looking at your coverage of this company on Fool.com. You have referred to Calavo as a small but mighty dividend payer. The company offers shareholders a single annual dividend payment based on the latest $0.95 per share distribution. The stock yields about 1%. The company's dividend history is not super well-established, but there's no denying that the total returns vs. the broad market have been unbelievable. That's whether you look at the past year or if you go back five, ten years. Definitely an outperformer here.

At the same time, the stock does have a bit of a premium valuation. It currently trades at about 33x forward earnings. But even with that higher valuation, the higher price point, I think you have to appreciate the story here, given the growing popularity of avocados worldwide. Even in the company's main market, in the U.S., Calavo mentions demographic changes that offer a major tailwind -- the U.S. Hispanic population is set to double in the next three decades. And, regions like Mexico are already known to consume far more avocados on a per-capita basis, so, the run up from that.

Also, you have a business that benefits significantly from scale. Calavo, as we've talked about, with that 30% share of the California crop back in 2016, it's one of the biggest avocado distributors among the 100 or so competitors in the market. The company mentions that a good portion of its cost structure beyond the fruit itself is fixed. The higher the volumes, the lower the cost per pound of product. That scale can be really helpful here.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.