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Understanding the Health Food Space

By: Nicole Urken | 05/08/14 - 04:37 PM EDT

Stocks in this article: WFMSFMHAINWWAVFWM

NEW YORK (TheStreet) - Aren't we seeing continued long-term trend of anti-obesity plays? Health food, organic food and beyond are in for the long-term. This was a big theme in Get Rich Carefully. So have you been scratching your head about the almost-20% decline in Whole Foods (WFM) yesterday to the high $30s, not to mention the long decline since it stood at over $60 back in November.

Whole Foods has historically been a great operator. But at these levels, even AFTER all of these declines, the stock is STILL trading at 25x P/E. With comps at 4.5% last quarter--another deceleration-- that is still, yes still, pricey. And speaking of pricey, Whole Foods has been "investing in price"-- a fancier way of saying lowering some of its prices-- in order to attract new customers and increase demand from existing customers. But Whole Foods' core customer is higher end and this hasn't translated. Ultimately, what we have here is a competition problem. Not only do we have more health food names growing-- like Sprouts Farmers Marekt (SFM), The Fresh Market (TFM), Fairway (FWM) and beyond. But we also have traditional supermarkets like Kroger (KR)rolling out more organic products. And even mass retailers like Wal-mart (WMT) are focusing on organic products. All of this is not a good combination as Whole Foods is beefing up its store grwoth.

Now, in terms of fundamental growth in the health food supermarket space, Sprouts Farmers Market is uniquely well positioned. Why? Because (1) It is a value-oriented company, targeting more of the middle income consumer versus the higher income demographic of Whole Foods. And (2) Higher store growth potential, from 160 stores currently to 1200 longer-term, which gives it a bit more 'growth junior' status relative to Whole Foods.  However, I STILL wouldn't buy this one right here, even after the strong quarter. Its steep valuation, even after the momentum sell-off, puts it at risk in this sort of market, there is an Apollo ownership overhang, and creeping competition remains an issue.

Even the vitamin shop names have been under pressure of late, though Vitamin Shoppe (VSI) reported a better quarter than GNC (GNC). Again, worries about competition, commoditization, and even some negative press (in this case about vitamins and supplements).

So, how can you play this health-food trend?

The best ways to play remain the health food plays that are selling to the supermarkets. Why? Because as traditional supermarkets like and mass-market names like Wal-mart also start offering organic products... and as health retailers like Whole Foods start expanding--perhaps too quickly--they will need to fill their shelves with more products.

So who are the best names? One, Hain Celestial (HAIN)--a house of organic and natural brands like Celestial Seasonings, Earth's Best, Terr, Garden of Eatin', The Greek Gods Yogurt to name a few. Plus, the company has been making acquisitions including Blue Print Cleanse (juices!) and Rudis(gluten free products) and is looking to increase its international exposure from about 60 countries to 100.

Who else? White Wave Foods Co (WWAV), the spin-off focused on products like almond milk that is much better positioned than its former parent company Dean Foods (DF). WhiteWave is well positioned with "better for you" type products -- including the Silk & Alpro brands, not to mention coffee creamers.

The bottom line: The health food long-term trend is not gone. If anything, it's stronger than ever. But you have to be careful how you play it. Avoid the competition and the price wars. Instead, go to the best-of-breed names that are selling into a range of supermarkets and mass retailers.

--Written by Nicole Urken in New York.

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