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Spoiled for Choice with Natural Grocers

NEW YORK (TheStreet) -- Investors in Whole Foods (WFM) and The Fresh Market (TFM) have recently reached out to let me know that they didn't appreciate my recent so-called "attacks" on the organic and natural foods industry.

Now, I'm not ready to back away from anything I've said. I believe I was more than fair. I will, however, point out that both companies deserve a great deal of credit for having built strong, profitable businesses. My issue, though, has been with their respective stock valuations, which still carry overly rosy expectations -- particularly in an industry that is growing more competitive each quarter.

To that end, while Natural Grocers Vitamin Cottage (NGVC) continues to outperform doubters like me, I still believe that it's only a matter of time before the company, as with Whole Foods and Fresh Market before it, experiences its own growth hiccups. That said, Natural Grocers' management, which has set out plans to expand internationally with 1,100 new stores, disagrees with me.

Plus, with recent reports suggesting that the organic and natural foods market is expected to grow to $80 billion over the next two years, management may very well be proven right. But both Fresh Market and Whole Foods, which are not only bigger, but better leveraged, are also hungry for that market share.

When you factor in the reality that conventional retailers like Wal-Mart (WMT) and Kroger (KR) have expanded their own organic offerings, Natural Grocers may even begin to see some natural declines. And they could happen much sooner than the Street expects.

Besides, even if I were to take a glass-half-full perspective and say that Natural Grocers could still be a well-run business as a smaller seller of organic foods, I still don't see how its valuation makes sense today -- not at a price-to-earnings ratio of 82.  That is twice the P/E of Whole Foods or Fresh Market. And with Natural Grocers' breathtaking 103% year-to-date gains, investors are risking a lot of money believing there is more unclaimed territory in this industry that rivals don't already know about.

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