Sometimes, seemingly unimportant news reveals some great investment ideas. Calavo Growers (NASDAQ:CVGW) may be the tastiest stock you could find right now.

After the market's close on Nov. 18, Standard & Poor's added Calavo to its S&P SmallCap 600 Index. The decision is a positive development for Calavo and warrants a closer look at the company's business.

A fruitful business
Calavo generates revenue by buying and selling produce, providing marketing and packaging services, and charging sales commissions. Over the last three years, the company has managed to grow revenue at an average annual clip of 11.3%, while profit has soared an average 57% per year.

Calavo's core product is avocados. Historically, most of Calavo's avocados were grown in California, but in recent years it has been diversifying its types of products and their sources in a bid to maintain high growth. Today Calavo sells avocados, papayas, tomatoes, mushrooms, pineapples, and processed guacamole, with products grown throughout North and South America. Despite the diversification, fresh avocados are still the company's mainstay, accounting for about 75% of sales.

The company seeks to expand its customer base by leveraging other fast-growing retailers such as Chipotle Mexican Grill (NYSE:CMG) and Whole Foods Market (NASDAQ:WFMI), while relying on the wide distribution of more established chains such as Safeway (NYSE:SWY).

For the past three years, avocado consumption in the U.S. has been constrained by limited supply. Calavo expects that to change in 2010, with a supply increase of at least 50%. That would provide a boost to Calavo's high-margin ripening and packaging services business. In addition, Calavo sees its growth being supported by its focus on healthier eating and an increase in Hispanic influence within the U.S.

The company also plans to continue diversifying the types of products it carries and the sources for those products. By increasing produce and processed food volumes through its existing distribution infrastructure, Calavo can continue a multi-year trend of increasing gross margins and decreasing selling, general, and administrative expenses (SG&A) as a percentage of gross profit. That's a time-tested recipe for increased operating margins and earnings growth.

A catalyst for gains?
Growing into an index provides two positive signals for investors. Being part of an index creates demand for the stock, as exchange-traded funds like iShares S&P SmallCap 600 Index, mutual funds, and other investment vehicles that track the index need to buy the stock. It also indicates that the company is growing faster than its market-cap peers.

For its most recent quarter, Calavo reported earnings and revenues up from the year-ago quarter due to increased volume of Mexican and Chilean fruit. Many companies have been reporting year-over-year earnings increases lately, but revenue growth has been harder to come by. The company also joined another elite group by raising its annual dividend from $0.35 to $0.50 a share in late September, bringing its dividend yield to 2.8%. As shown in the table below, Calavo trades at reasonable valuations compared to other companies in the farm products industry. A higher estimated future growth rate than most of its industry should justify a premium valuation.



Dividend Yield

Est. Future Growth Rate

Total Debt to Equity

Calavo Growers





Archer Daniels Midland (NYSE:ADM)





Bunge (NYSE:BG)





Fresh Del Monte





Chiquita Brands International (NYSE:CQB)





Sources: The Motley Fool and Yahoo! Finance. TTM = trailing 12 month; NM = not meaningful due to negative earnings.

With increasing revenue and earnings, a nice dividend payout, strong balance sheet, and reasonable valuation, a little guacamole might be just what an investor's portfolio needs to grow some nice returns.

More on Calavo Growers and agriculture:

Fool contributor Russ Krull always puts guacamole on his burrito, but he doesn't own shares of any stock mentioned in this article. The Fool owns shares of Chipotle Mexican Grill, which is a Motley Fool Rule Breakers pick and a Motley Fool Hidden Gems selection. Whole Foods Market is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.