4 Top Stocks To Ride The Organic Food Trend

By Markets Fool.com

Big food is under siege. As consumers increasingly assert their preference for organic and natural foods, the traditional processed food makers are losing ground. Major food companies like McDonald'shave made commitments to serve antibioitic-free chicken and cage-free eggs, and others, like Kraft Foods and General Mills, have promised to remove artificial preservatives and dyes from popular products like Kraft Mac & Cheese and Cheerios.

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And the trend is unlikely to stop. Industry CEOs say they see growth ahead, and research group TechSci project a 16% compound annual growth rate through 2020 in organic foods globally.As in any changing market, there are bound to be winners and losers. To help you hunt down the winners, we asked for four picks from our analysts for stocks to ride the organic food wave. Here's what they had to say.

: If an investor is interested in getting in on the organic food trend then I'd suggest they keep things simple and buy the one company that played a huge role in popularizing it in the first place -- Whole Foods.

That might sound like a bad idea considering that the company is dealing with some serious challenges at the moment. Competition in the space is heating up, which caused Whole Foods same store sales to actually decline by 1.8% last quarter. It's also recovering from last summer's PR nightmare after news broke that it was overcharging some of its customers on sales of pre-packaged foods. There was also the news that it had even opted to lay off 1,500 employees last year, which is never a good sign, especially for a company that prides itself on being a great place to work.

However, despite all of the negatives, I think there are reasons to be optimistic about the company's future. First, the company is investing to become much more competitive on pricing, as it hopes to eventually shed its "whole paycheck" nickname. While that will likely pressure its near term results, it's a move that should pay off big time in the long term.

Next, the company has plenty of room left to continue to expand its store base, as it currently operates only 436 or so stores in the US, Canada, and UK. That's a small number compared to the 1,200 Whole Foods stores that the company believes could exist in the US alone. The numbers get much bigger when you add in its new smaller format "365" stores and the international opportunity.

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Finally, with Whole Foods stock down more than 40% from its 52-week high, it is currently trading at a compelling valuation. The company is currently trading for roughly 19 times its trailing earnings, lower than the market average, which is surprising considering that Whole Foods has been a market darling for years.

If Whole Foods can prove to the market that its growth initiatives will pay off in the long term then it wouldn't surprise me to see the company regain its premium price. Until that happens investors can enjoy the company's dividend yield of roughly 1.75% and know that management has been aggressively repurchasing its own shares. That's why this stock is my favorite way to play the organic food trend right now.

has an established history as a leader in organic and health-oriented foods, and looks to be well-positioned to ride momentum in the category. The roughly $3.7 billion market cap company markets organic food brands including Plainville Farms turkeys, Tilda rice, and Ella's Kitchen baby food, and has brick and mortar distribution through Target, Walmart, Publix, and other chains. The company also has a growing online customer base driven largely by sales through Amazon. Roughly 40% of Hain Celestial's foods are organic and 99% are non-GMO.

The beginning of February saw the company post record quarterly sales and profit, butHain Celestial has seen its share price fall by roughly 40% over the last year, with big declines in valuation corresponding with downgrades by analyst firms and earnings reports that delivered weaker-than-expected results.Last quarter's sales increased 8% annually while earnings rose 6%; however, lukewarm performance for the company's Celestial Seasonings teas and slipping sales in the United States and U.K. segments cooled the market's reaction to the results. The reduced floor space in key U.S. and U.K. retailers -- which contributed to declining quarterly sales in the segments -- as well as a rush of new competition in organic foods are risk factors for potential investors to weigh, but these recent uncertainties have significantly lowered the stock's cost of ownership.

Hain Celestial currently trades at roughly 17 times projections for forward earnings, which puts it below the forward P/E estimate of roughly 24 for the consumer staples sector, and the company has been delivering impressing earnings growth. The company's price-to-earnings-growth (PEG) ratio of roughly 0.5 is well below the PEG threshold of 1 used as an indication of pricing fairness, and Hain has the foundations in place to benefit from growing consumer interest in natural and organic foods -- even as more competitors enter the space.

As long as the growing demand for organic foods holds, Hain Celestial looks positioned to ride the wave.

: Whole Foods may have been the first mover in the organic grocery space, but, to steal a favorite Warren Buffett saying, "Though the early bird gets the worm, the second mouse gets the cheese." That appears to be the scenario unfolding with Kroger, which came late to the organic and natural foods business but is reaping huge rewards from the trend.

The supermarket chain only introduced its Simple Truth store brand a few years ago, but it soared to over $1 billion of revenue in 2015 -- easily becoming Kroger's most popular launch yet. The brand has helped Kroger post market-thumping sales growth for several years running (comparable store sales growth has been positive for 48 straight quarters).

It accomplished that feat in part by driving down prices, and thus profitability, on organic food products. "Our customers are very clear [that] they don't want to have to pay a premium for natural and organics," Chief Operating Officer Mike Ellis explained to investors a year ago. "And we're trying to make sure that they can get a good quality product at a price that's comparable to the non-organic brands and in some cases actually the same price."

Kroger can afford the brutal price competition because it enjoys a much lower cost structure than Whole Foods. But don't let its 22% gross profit margin (compared to Whole Foods' 35%) scare you off. Kroger's earnings have been growing at a double-digit pace lately, exceeding management's long-term goal to boost profits by between 8% and 11% each year.

: The nation's #1 producer and distributor of shell eggs, Cal-Maine Foods is uniquely positioned to benefit from the growing popularity of organic and humanely raised foods, especially cage-free eggs.

In the last year, nearly every major fast-food chain has committed to using only cage-free eggs. Next year, Costco Wholesale and Trader Joe's will hop on board in the grocery channel. The industry is preparing for the shift. Cal-Maine has partnered with #2 egg producer Rose Acre Farms to build a cage-free hen house in Texas that will house as many as 2.9 million layers. The company currently has a 23% share of the national egg market, and has grown consistently throughout the years thanks to a strong track record in acquisitions. It is now focused on acquiring specialty egg companies that produce cage-free eggs and other higher-priced variants. Cage-free eggs can cost as much double the cost of caged eggs, meaning a full transition to cage-free eggs could boost Cal-Maine's revenue by 80% without even any additional volume growth.

That's the kind of trend you want to get behind, and as an added bonus the company currently offers a dividend yield of over 6%.

The article 4 Top Stocks To Ride The Organic Food Trend originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fools board of directors. Brian Feroldi owns shares of Amazon.com, Hain Celestial, and Whole Foods Market. Demitrios Kalogeropoulos owns shares of Costco Wholesale, McDonald's, and Whole Foods Market. Jeremy Bowman has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Costco Wholesale, Hain Celestial, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.