A Super-Natural Investing Opportunity
America's appetite for health food is seemingly insatiable. Here are some companies poised to capitalize on the trend.
By Jonathan Weber

(Business 2.0) – Only a decade ago, it was hard to get a decent cup of coffee in most of America--and then the Starbucks juggernaut transformed the way we think about that once-humble drink. I'd submit that something similar is happening with food. We all used to accept supermarket fare without question, and then Whole Foods Market (ticker symbol: WFMI) showed us that even the daily basics could be fresh, nutritious, and delicious. That realization, coupled with our national obsessions over obesity and food safety, has led to annual growth of 17 percent in retail sales of natural foods and will be a far more powerful driver of long-term eating trends than Atkins or any other diet fad. The transition from a chemical-heavy diet to one that's more nutritious won't be simple. But I'd wager that it will be quicker--and ultimately more profitable--than most people think.

Investing in this change is not a simple matter, though. Whole Foods, a terrific company by any measure, is awfully expensive at more than 40 times earnings. (Disclosure: I own shares in Whole Foods.) Many top organic brands, such as Kashi, Silk, and Stonyfield Farm, have already been snapped up by Big Food. But opportunistic picks from a few seemingly unrelated areas could add up to a nice bet on the overall trend.

Atop the food chain, beside Whole Foods, sits the other "super-natural," Wild Oats (OATS). The company has disappointed investors for years, lagging behind Whole Foods in transforming itself from a collection of old-style bins-of-granola health-food stores into a slick next-generation supermarket chain. But it's a sure beneficiary of the aforementioned trends, and the stock is cheap; patient investors should give it a look. A little further down the chain is United Natural Foods (UNFI), the primary distributor for both Whole Foods and Wild Oats: Its recently renewed contract with Whole Foods and overall market strength should mean more upside over the long run.

On the product front, Hain Celestial (HAIN) is the gorilla, with thousands of offerings, leading brands such as Health Valley cereals and Earth's Best baby foods, and even a McDonald's contract for its veggie burger. Partly owned by Heinz, Hain has struggled to control costs and integrate its many acquisitions, and the stock has sputtered accordingly. Wall Street also worries about competition from large food companies like General Mills and Kraft, which are moving aggressively to develop--and acquire--healthful brands. But the organic niche remains a small business for a Kraft-size corporation, and if Hain can get its operational glitches under control, it should be able to outmaneuver its giant rivals.

Moving another step down the food chain, we get to MGP Ingredients (MGPI), an agricultural products firm with a strong focus on wheat proteins and starches used in vegetarian and low-carb foods. The company's stock took off last spring on enthusiasm over its low-carb products, only to collapse in the fall as the Atkins craze failed to translate into sales. Low-carb is over as a commercial force unto itself, but consumer interest in healthier eating will persist and should help MGP.

Finally, while it's chancy to bet on the dynamics of food scares, greater consumption of unprocessed fare is all but certain to bring a higher incidence of salmonella, E. coli, and other contamination. Michael Doyle, director of the Center for Food Safety at the University of Georgia, says tainted produce will likely be a major concern in the next few years. That creates an opportunity at the lowest end of the food chain. Since keeping comestibles free of harmful microbes is really all about basic sanitation, investors might consider Ecolab (ECL), a specialty chemical and cleaning services company: The food industry is a major client, and last year Ecolab acquired Alcide, which makes sanitation products for livestock and food. Another company to keep an eye on is Neogen (NEOG), a leader in food testing. Neogen may be able to capitalize on both the natural-foods trend and any panic arising from it--which should whet just about any investor's appetite.

The Natural Food Chain

Options abound for investors seeking growth companies that are riding the health-and-nutrition trend.

Source: Business 2.0 research