Editor's Note: This column was originally published as an alert to subscribers to Stocks Under $10 on Dec. 28.
As Americans take more notice of their diets, corporate marketing departments are trying to meet their needs. In the past 18 to 24 months, fast-food restaurants like McDonald's (MCD - Get Report) have jump-started sales growth by introducing gourmet salads to their otherwise high-calorie menus. Privately held sandwich shop Subway has also seen its popularity boom, with ads proclaiming dramatic weight loss achieved by customers eating its low-fat hoagies.
After some research, we believe the healthy-foods name to own in the Under $10 space is Wild Oats (OATS), and we added 400 shares at around $8.50.
The natural foods retailer is third only to Whole Foods Market (WFMI) and privately owned Trader Joe's in domestic sales. Even though these stores account for less than 10% of all U.S. grocery sales, Katherine DiMatteo, executive director of the Organic Trade Association, said in a Dec. 3 MSNBC.com article that natural foods revenue can more than double from an expected $15 billion in 2005 to $32 billion by 2009.Wild Oats is in the late stages of a turnaround that has seen the divestiture of some high-priced stores that management bought in the '90s, as well as increasing sales of the company's private-label products. Improvements should continue as the retailer targets square-footage growth and increased operating efficiency. We believe it will move into the double digits if management reports two consecutive quarters of solid results. Wild Oats was not always a single-digit stock. In 1999 it was trading in the high $20s, and the retailer used the stock as currency to make a lot of acquisitions. In hindsight, the prior management team overpaid for these deals, and shares fell under $5 by the end of 2000. To get the company back on track in 2000, management began closing or selling underperforming stores, 38 in all according to the latest annual filing with the Securities and Exchange Commission.