(FORTUNE Magazine) – Whether or not herbal remedies such as St. John's wort, green tea, and kava really help fight depression, reduce the risk of developing cancer, or relieve stress, one thing is for sure: they are having a salubrious effect on the once sleepy shares of tiny teamaker Celestial Seasonings. In the past year, the stock has flown 160% to $54. Celestial is the first recognizable brand to offer a line of herbal supplements at a time when there is a growing acceptance, especially among aging baby-boomers, that these products are medically beneficial. (An increasing body of evidence supports this belief, although nothing is conclusive.) CEO Steve Hughes explains, "Boomers are doing everything they can to extend prime time up to the point that they draw their last breath."

Celestial's founder and chairman, Mo Siegel, is a case in point. He is an exceedingly fit 48-year-old who, in addition to his daily allotment of vitamins and minerals, also takes ginseng, ginkgo biloba, and garlic supplements. For those who ignore the potential health benefits of herbs, he warns, "the alternatives are a bummer." And besides, he says, the worst thing you can get from taking herbs and minerals is "expensive urine."

Celestial is in many ways an extension of Mo's personality, which has always been centered on herbs. On a recent hike with this reporter through mountain paths on the outskirts of Boulder, Colo., Mo somehow is able to locate the A-frame shack where he briefly lived in the summer of 1970. That was the year the Beatles were breaking up and Crosby, Stills, Nash & Young's album Deja Vu was topping the charts. It also was the year he founded the company. His friends at the time included a pair of women nicknamed Celestial Seasonings and Trish the Dish. Mo adopted the more marketable of the two names. He remembers combing the hills for raspberry leaves, red clover, peppermint, and wild chamomile "like a grazing animal." The shack is where he dried his first 19 bales of hand-picked herbs and packed the resulting tea into muslin bags. All the ingredients were printed on the outside of the bag with a meat marker. On his first sales trip to Chicago, in 1971, the list of ingredients came off on the sweaty palms of a health-food store owner. That year's sales were $79,000. Mo recalls this fact as he stands on the shack's porch, looking out over a canyon called--prophetically, as things turned out--Wall Street.

Mo soon switched to using indelible ink on his packaging and purchasing his herbs from around the world instead of arduously picking them himself. He left the company after he and other investors sold out for close to $40 million to Kraft in the mid-1980s. A management-led LBO in 1988 recaptured Celestial's freedom while saddling it with massive debt. Three years later Mo returned as CEO and chairman. He took Celestial public in 1993 and has since helped reduce its long-term debt by 74%, to a mere $6 million. Sales for the fiscal year ended last September were $79 million; profits, $5.7 million. The company now controls half the herbal tea market in the U.S.

Celestial tried to branch out once before--into the bottled-tea business, back around the time of its IPO. That effort bombed because, even when the Snapple craze was at its height, the market was more about sugar water than healthy drinks, and it was already cluttered with much stronger competitors, including Coke and Pepsi.

As Celestial tries to extend its brand once again, this time into herbal supplements, there are a few crucial differences. First, Mo brought in new CEO Hughes last year. Hughes previously helped develop ConAgra's Healthy Choice line of foods into an almost $1 billion business and later headed sales and marketing for Seagram's Tropicana division. Second, the herbal supplements market--expected to reach about $800 million at mass retailers this year, up from $440 million in 1997--is completely fragmented. Hughes reasons, "The first mover in a category usually makes more than its fair share of the profits."

Finally, herbal supplements are a dream category for Celestial because it plays to the company's core competitive advantages of sourcing herbs, blending them together, and distributing them through mass-market channels, such as supermarkets and other retailers. Already Celestial's teas can be found in about 95% of all supermarkets in the country. And of the estimated 19 million Americans who currently use herbal supplements, about half (mostly women) also drink Celestial tea regularly.

Hughes is betting big on the pill market. He plans to spend $40 million on advertising during the next two years to launch a line of more than two dozen products, including trendy single-herb extracts such as echinacea, ginseng, and St. John's wort, as well as formula blends with names like Mood Mender and Tension Tamer. The supplements bring in about 30 cents per pill, vs. about a nickel a bag for tea.

Analysts expect the company to post 14% earnings gains this year, to $1.56 a share, as marketing costs for tea are trimmed back and new products such as green tea grow in popularity. Of course, it could make about 50 cents per share more this year if it did not spend money to launch the supplement line, which won't be profitable until at least the second half of 1999. But the early signs are positive: As Celestial began to roll out its line of pills last quarter, they garnered $6 million in sales, about three times analysts' forecasts. Celestial is also introducing chai (a spicy Indian tea with cinnamon and cardamom), tea versions of its supplements, and organic teas. Mo says, "If we do this right, we will be herbs to people."

Celestial's prospects may look heavenly, but does its stock warrant a P/E multiple that is 34 times this year's estimated earnings? The P/Es of other vitamin makers, such as Twinlab or Nature's Bounty, are closer to 30. Remember, Celestial's been selling pills in significant amounts for only one quarter. If you look at Celestial just as a tea company, logically its stock should trade at a discount to other supplement players. With only four million shares outstanding, however, the stock is very volatile, and logic may count for less than it should. Clouding the outlook is speculation that Celestial might buy other supplement makers to expand into mail-order and vitamins, or itself become an acquisition target.

After bouncing around recently, the stock is now near Hanifen Imhoff analyst Carole Buyers' 12-month price target of $55. Mo himself sold over a third of his shares about four months ago at $35 a share or less (to pay off some debts, he says). FORTUNE's take is that the tea business alone makes the shares worth around $40. Investors should add a premium for the probable success of the herbal supplements (Wal-Mart may carry the line). But at any price higher than the mid-40s, a positive mood will more likely be maintained by those who refrain from dosing on the stock.

--Erick Schonfeld