Natural Products Stocks Continue Slow Recovery in 3Q99
Published: Friday, October 01, 1999
The Natural Business Composite Index ™ (NBCI), used as an overall measure of performance, is down 11.7% for the year, but was up 1.6% in the third quarter. The Natural Business Top 20 index showed an even more significant improvement, up 5.1% in the third quarter to reach a negative 3.8% return for the year.
Despite these positive signs, natural products stocks still are trailing their mass-market counterparts. For example, the Dow Jones Industrial Average is up a healthy 12.4% for the year. The S&P 500 Index has slowed in recent months but is still returning a positive 4% for the year. The top performer in the mass-market segment is the Nasdaq index, which is returning an excellent 25.4% year-to-date.
The NBCI’s long-struggling Botanicals & Supplements sector demonstrated slight growth in the third quarter, returning a positive 4.8%. A large part of this improvement can be attributed to AMBI Inc. (AMBI), which is up 5.9% in the third quarter to a staggering year-to-date return of 141.2%. However, despite its growth in 3Q, this sector still is the weakest performer year-to-date, down 24%. In fact, nine of the 10 worst performers in the NBCI year-to-date are Botanical & Dietary Supplements companies.
The Food & Beverage segment showed little change in 3Q, up 0.1% to a year-to-date return of negative 16.4%.
The most intriguing aspect of this segment is the tremendous difference between the performance of large and small companies. While larger companies such as Gardenburger (GBUR) and Balance Bar (BBAR) have been very weak in recent months, small companies such as Tofutti Brands (TOF) and Monterey Pasta (PSTA) are returning triple digits year-to-date. There are four Food & Beverage sector companies in the NBCI’s year-to-date Bulls chart, all of which are the smallest members of the segment.
The Consumer Products sector is the best-performing segment of the NBCI, up 76.5% in the third quarter, and showing a 65.2% return for the year. The drastic improvement in the performance of this segment can be attributed to SafeScience (SAFS), which is the best-performing natural products-related stock year-to-date, returning a positive 219%.
The Retail & Distribution segment was the only negative-performing segment in the third quarter. The segment was down 1.6% during the period but still is returning 4.9% for the year. The slight downturn in this category can be attributed to the technical problems experienced by United Natural Foods (UNFI), which have sent that company’s stock hovering near its 52-week low. A bright spot here, however, is Wild Oats Markets (OATS) which is up 24.6% year-to-date.
The begging question becomes why have natural products stocks been such poor performers over the last year?
One perspective comes from analyst Yudi Bahl of Minneapolis-based U.S. Bancorp Piper Jaffray. “Growth rates in the industry have slowed down due to a lack of new products and product overflow into the market,” Bahl says. “And since growth is second only to earnings estimates in importance, we can see why stocks have been slumping. However, I do see signs that growth rates are recovering, and I am very optimistic about natural products stocks in the coming months.”
Another issue with most natural products stocks is their size. During the past three years, smaller cap indices such as the Russell 2000 and the Micro Cap 1000 have greatly underperformed the larger market indices such as the Nasdaq and the S&P 500. The Micro Cap 1000 Index, which includes 11 natural products stocks, has been the poorest performer, returning a mere 6% during the past three years. Bahl believes that “micro-cap stocks suffer because of the size issue. There are too many questions about market share and whether management can take these companies to the next level,” he says.
It is apparent that natural products
companies need to maintain healthy growth rates and convince investors that management has the ability and expertise to maintain market share. As these characteristics become a part of companies’ goals, it will be interesting to see whether natural products stocks will continue their recovery at present or improved rates.
Chuck Slotkin is president of and Alan Jaffe is an associate with Nature’s Equity Inc., a New-York-based investment banking and business development firm. Call 212.580.1666 or e-mail info@naturesequity.com for information.