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3 Overlooked Organic Food Plays Set to Outperform

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Binge-watching The Walking Dead has led to an important lesson about the grocery market industry - sheer numbers and brute force are not enough to ensure survival.

3 Overlooked Organic Food Stocks Set to Outperform

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Too often, grocery chains cling to the "bigger is better" mentality, allowing smaller businesses with unique specialties like organic food items to prosper through differentiation. Such organic food stocks have recently rallied, while their larger competitors continue to struggle.

A classic example is supermarket giant Kroger ( KR ). As of Tuesday's close, KR stock is down roughly 12% year-to-date, but beyond that, it's lost 16 cents over the past year.

Essentially, shares have gone absolutely nowhere since early 2015, a sharp cry from the robust gains made since the onset of the Great Recession. Ominously, KR stock has failed multiple times to hit last December's highs - are long-term investors getting tired of shopping at Kroger?

The answer could very well be a resounding yes. Typically, grocery markets have low profitability margins ; however, we all need to eat, preferably several times a day. What they lack in margins is made up for through sheer volume of buyers. Due to the intractable need, supermarkets can usually rely on consistent sales, economic cycles be damned.

But where are the shoppers today? Yes, the economy ranges from bad to not so great, but organic food specialties are also under the same boat. The difference is in the nature of the competition. Big-box retailers such as Walmart ( WMT ) and Target ( TGT ) have steadily moved into the grocery industry, pressuring the already thin margins of KR and its ilk. What makes this worse for Kroger is that they have been acquisition-happy . Their asset base is expanded, but so too is their total liability.

There is something to be said of too much of a good thing, and KR investors could pay a heavy price. On the other hand, organic food stocks aren't as laden with such liabilities. In addition, organic food products are almost always higher-ticket items. Consumers recognize that there is a price for quality, and many are willing to pay it.

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This bodes well for the smaller guys in an increasingly crowded sector. Here are three overlooked organic food plays that should continue to build momentum in the markets.

Organic Food Stocks to Buy: The Fresh Market Inc (TFM)

Click to Enlarge Organic food retailer The Fresh Market ( TFM ) has had a very rough year in 2015, losing 43% of value in the capital markets. As such, management will be eager to get 2016 moving in the right direction.

TFM was given a small, though short-lived boost when Credit Suisse upgraded its assessment of its stock. More significantly, TFM began entertaining the idea of selling the company, particularly because of sharply lagging sales.

We'll get a better idea of where TFM goes after it releases its fourth quarter of fiscal year 2016 results on Thursday. The consensus forecast for earnings is 48 cents, which is three cents below the target of the year-ago quarter. In that report, EPS beat estimates by four cents. Despite TFM's troubles in the markets, it's not completely out of the question that they could pull off a repeat earnings surprise. On a quarter-over-quarter basis, revenue in FY 2016 has so far exceeded FY 2015's results by an average of 5%.

From an investor's perspective, it's hard not to acknowledge the deeply discounted price of TFM stock. While it's not the perfect organic food stock, TFM is significantly undervalued against forward earnings expectations. There's also a lot of strength in the balance sheet, particularly the amount of cash on hand relative to TFM's debt levels. That gives TFM some cushion to weather difficult storms.

With so many traders abandoning TFM in 2015, now may be a great time to pick up shares - despite a rocky economy, there's a lot of stability in this name.

Organic Food Stocks to Buy: Whole Foods Market, Inc. (WFM)

Click to Enlarge Among organic food stocks, Whole Foods Market ( WFM ) easily trumps the competition with a market capitalization just north of $11 billion. At the same time, it hasn't been an easy road for WFM.

Last year, the markets were especially rough on the trendy organic food store as shares lost more than 32% of value. This was in part due to the substandard earnings performances throughout 2015. But with the new year comes new opportunities, so will WFM make the most of it?

Renowned options trader Rick Rouse thinks so. In fact, Rouse made an impressive forecast , suggesting InvestorPlace readers buy WFM March $32 calls - or bullish options contracts that would give buyers the right to acquire WFM stock at the $32 strike price. In less than a month after his report, shares charged up beyond $33. You couldn't time a stock pitch better than this!

Fortunately for those who may feel that the ship has sailed, WFM has strong fundamentals, indicating more room to run. Profitability margins are much higher than non-organic food stores and annual revenue trends since FY 2011 still average double-digit growth. That's likely to change in the current fiscal year as economic uncertainties take their toll. That said, Wall Street has likely tapered down its expectations accordingly.

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Best of all, WFM has a dedicated consumer base - visiting your local Whole Foods Market would make that quite apparent. That kind of support is something that money can't buy, which makes this organic food leader an enticing opportunity.

Organic Food Stocks to Buy: Sprouts Farmers Market Inc (SFM)

Click to Enlarge Somewhere in between the featured organic food stocks is Sprouts ( SFM ). Sprouts dwarfs The Fresh Market in terms of market cap, yet SFM's 217 stores across 13 states is roughly half that of Whole Foods Market.

That should provide a slight advantage to SFM as it appears to have the right balance between top-line sales growth and profitability. In fact, its operating and net margins are superior to that of WFM and SFM.

That had to come across the minds of WFM's executive leaders when they were considering a buyout of SFM last year . Another aspect is earnings performance. Simply put, SFM typically shines, often beating Wall Street expectations by a comfortable margin. A large part of this has to do with the fact that SFM - founded in 2002 - is a young, upstart company that has successfully differentiated itself with its fresh and organic food offerings. Even though the initial growth spurt has simmered down, over the past three years, revenue growth still averages a lofty 26%.

You can't deny numbers like that, and it was primarily the reason why I discussed SFM as a buying opportunity back in August. Despite some heavy volatility, SFM has since moved up 17%. It certainly looks like the stock has found some stability. In September 2015, institutional ownership of SFM was nearly 93%. That's come down to 62%, which could be viewed as a contrarian indicator. Now that Sprouts has demonstrated serious momentum, the big money may want to jump back in.

The bottom line is this: SFM was a solid investment in a very bad year for both grocery and organic food stores. This year, the situation is more favorable, which would only make SFM an even better buy.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

The post 3 Overlooked Organic Food Plays Set to Outperform appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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