Source: LOHAS Weekly Newsletter
Published: Monday, October 01, 2001

NEW YORK—Are natural products company stocks in a bull market or are they just clawing their way back to reasonable valuations after a multiyear decline in value? The stock prices of natural products, as measured by the Natural Business Composite Index, rose 35 percent from Jan. 1 through mid-September, even though the trend in the equity markets has been down. Even the stocks of supplements and botanicals companies reversed the swoon into which they fell beginning in summer 1998.

A majority of companies in three out of the four sectors have had increasing stock prices this year, and both large and small companies have participated in the rally. This performance was striking given that the NASDAQ and Russell 2000, two measures of overall small-capitalization-company performance, were down 16 percent and 4 percent, respectively, during the same time.

Supplements & Botanicals

Twenty-four out of the 36 companies in this sector had increasing stock prices as the aggregate sector performance rose 67 percent. Small companies such as Pacific Health Labs (PHLI) performed exceptionally well. One of the fallen angels, PHLI’s share price increased more than 20-fold to $6.95, based on exciting new product possibilities. Other strong performers included NBTY Inc. (NBTY), up more than 300 percent, and Nutraceutical Intl. (NUTR), up about 270 percent. NBTY, with annual revenues of $773 million, continues to be an industry leader.

Alternatively, only nine, or 25 percent, of the companies in this sector are profitable. Six of the profitable companies had sales of more than $100 million.

Food & Beverage

This sector was up only 7 percent through mid-September, although the group of larger food and beverage companies was up 16 percent. In addition, the health of the sector is evidenced by the fact that eight out of the 14 companies are profitable. Sector leaders such as Galaxy Foods (GXY) and Horizon Organic (HCOW) are up 63 percent and 150 percent, respectively. Green Mountain Coffee (GMCR) is up 12 percent this year after a meteoric rise last year. Monterey Pasta (PSTA), up 41 percent, the proverbial Phoenix that arose from its ashes, continues to be recognized by investors for its solid recovery. Also performing well was Vermont Pure Holdings (VPS), which was up 30 percent even though it is unprofitable.

Retail & Distribution

This was the only sector to have fewer gainers than losers as only three out of seven companies had rising stock prices. Nonetheless, this sector was up 11 percent through mid-September. United Natural Foods (UNFI), on the basis of strongly recovering earnings and a significant market position, had a 145 percent increase in value. Wild Oats Markets (OATS) has more than doubled this year after a string of negative earnings reports and management changes caused investors to dump the stock last year. Acquisition rumors have helped the stock recover some of its value. Whole Foods Market (WFMI), one of the industry’s bellwether stocks, is up slightly after adjusting for a 2-for-1 stock split last spring. UNFI and WFMI are the only profitable companies in this sector.

Consumer & Personal Care

Products

This sector has shown some life this year as it is up 23 percent. Four out of the six companies are up, although only Gaiam (GAIA) is profitable. GAIA is building a recognized brand name in the health and lifestyle products market. Two other companies, CNS-Breathe Right (CNXS) and RMED Intl. (TUSH), the Tushies brand, were up 17 percent and 32 percent, respectively. Although both companies are currently unprofitable, investors may want to watch these companies for signs of a turnaround.

The Future: Cautious Optimism

Before investors take out a home-equity loan to buy natural products company stocks, three additional factors need to be taken into consideration. First, most of the publicly traded companies are not profitable. Lack of profitability was a contributing factor to the fall of stocks in 1998. Second, the current low-growth domestic economy could also moderate the industry’s historically hot growth rate. Third, most of the stocks of these companies hit their peaks in June and July before falling back. Any or all of these conditions could put a damper on future price increases as well.

Chuck Slotkin is president of and Chris Spoust is an analyst for Nature’s Equity Inc., a New York-based investment banking and business development firm. For more information, contact 212.580.1666 or NEIChuck@aol.com.