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  1. Home
  2. / Investing
  3. / Consumer Discretionary

Food Stocks for Thought

Three names in the high-end food sector to sink your teeth into.
By SHAM GAD Feb 24, 2014 | 02:30 PM EST
Stocks quotes in this article: CMG, WFM, UNFI, NDLS, CHEF

Ask anyone about the future and how to profit from it and the buzzwords you will hear are usually technology, social media and big data. I would add food to that list, specifically, food that promotes a higher quality of life. In the coming decade, I believe there's tremendous growth potential in the area of high-quality foods that are both better for the body and for the environment.

Just look at restaurant standout Chipotle (CMG) and natural grocer Whole Foods (WFM). Both companies don't focus on selling at the lowest possible price; rather, they focus on product differentiation and intangible value that higher-quality foods are believed to offer.

Chipotle has a higher cost of goods than most comparable restaurants, yet its profit margins are higher than virtually all other restaurants. In business school, you are taught that lower costs leads to profit maximization. In the real world, Chipotle confirms that consumer will pay more for a better product but, more importantly, consume more of it. 

Whole Foods was thought to be a destination of the so-called one percent, and during the recession, some wondered whether such high-priced groceries could thrive. I think that question has been put to rest. I believe that investors would be well-served to keep a close eye on the leading companies catering to the growing passion for higher-quality foods and ingredients.

 United Natural Foods (UNFI) is the leading distributor to the natural foods industry. A big chunk of its business goes to Whole Foods -- think of it as the Sysco (SYY) of the natural-foods market. Trading at 30 times earnings is on the high side, but if you can catch this company at a 20-25 multiple, take a closer look.

Noodles & Co. (NDLS) is a fast-growing restaurant concept that offers noodle dishes from the world over, as well as sandwiches, salads and soups. Each dish is made fresh to order using the finest ingredients. The company does not allow tipping for service. If you haven't heard of this company, you will; it's getting strong accolades. After trading for as high as $51, its shares have fallen back to $37. Valued at $1 billion, the price tag is still full of the hype but worth watching.

The Chef's Warehouse (CHEF) is a specialty distributor of food products to hotels, restaurants, country clubs and fine-dining establishments. Its catalog includes more than 16,000 items including artisanal cheeses, hormone-free meats, infused oils and other specialty ingredients that support menu-driven food establishments. At about $23 per share, the company is valued at 30x earnings -- not a price I would pay, but a company I would put on my watch list. With a market cap of $570 million and about $100 million in net debt, CHEF would make a wonderful acquisition for a distributor like Sysco.

The foodie buzz is in full effect thanks to Chipotle and Whole Foods, which have demonstrated the superior growth and profitability of this market segment. But keep an eye on this industry and any opportunity for an attractive entry point.

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At the time of publication, Gad had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

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