Four organic food stocks that are good for your health, bad for your portfolio

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Load up on the beet juice and soy milk desserts. This is the week when we get to celebrate, once again, the evolution of the North American palate.

Among the companies reporting over the next few days are several big players in the organic and natural food sector. They include Whole Foods Market Inc. and Vitamin Shoppe Inc. on Wednesday, followed by Hain Celestial Group Inc. and Sprouts Farmers Market Inc. on Thursday.

These companies share two characteristics: They deal in products that are purportedly good for your body, and they issues shares that, at least recently, have been downright nasty for your portfolio. Hain's stock price has slid 14 per cent this year, while shares of Whole Foods, Sprouts and Vitamin Shoppe have all plummeted about 40 per cent since the start of January.

It wasn't supposed to be this way. Every retailing expert worth his or her no-sodium Nu-Salt has trumpeted the inevitable rise of organic products that appeal to an increasingly health-conscious consumer. The shift to kale chips and quinoa snack bars is already well under way, according to market researcher Euromonitor International. It says global sales of organic food are expanding at 5 per cent a year, roughly twice as fast as other packaged foods, and should hit $37-billion (U.S.) this year.

So why haven't the leading purveyors of natural goodness benefited from the granola boom? In part, it's because of some individual missteps.

Whole Foods, for instance, took a public relations flogging in June when investigators for the New York City Department of Consumer Affairs found the upscale natural grocer had mislabelled weights of some fresh food items, leading to overcharges ranging from 80 cents to nearly $15 an item.

The pricing scandal involved only a handful of stores, but nonetheless buttressed perceptions that only hedge fund managers can afford to nosh on the company's groceries. Whole Foods issued a prompt apology for the mispricings and vowed to prevent such accidents in future, but its sales growth slowed in the wake of the incident.

The dent in Whole Foods' sales graph is evidence of the increasingly competitive nature of the organic food business. People now realize they can go to many places for their tempeh and cashew butter. Everyone from Wal-Mart to corner stores stocks at least some products designed to appeal to healthy eaters.

The growing competition poses a threat to retailers such as Whole Foods, Sprouts and Vitamin Shoppe and has led them to search for new strategies to keep customers loyal.

Whole Foods says it will launch a new chain next year called 365 by Whole Foods Market that will use lower prices and smaller stores to target younger shoppers. Vitamin Shoppe, which sells exactly what its name suggests, is counting on its expanding line of Protein Pantry pancake mixes, spreads and other products to bulk up same-store sales. Sprouts, a grocer specializing in fresh organic products, is also hoping to grow sales of private-label products.

At Hain, which makes a wide variety of organic products ranging from Earth's Best baby food to Greek Gods Yogurt and Celestial Seasonings tea, the issues are slightly different. Revenue and profit are growing at a rapid clip, but the market appears to be growing wary of the company's elevated valuation. Even after the share price slide this year, Hain stock still sells for 27 times trailing earnings, well above the market average of about 18 times.

Investors seem less and less willing to pay such premium valuations. While everyone agrees that the shift to healthier, organic products is a strong and promising trend, shareholders don't see why they should have to shell out unusual amounts to participate in what has become a general phenomenon.

Whole Foods provides a good case in point: It spent years trading at a price-to-earnings multiple that was typically at least twice that of the S&P 500. Over the past two years, however, its valuation has slid to the point where it is just about exactly in line with the broad market. In investors' eyes, it appears that Whole Foods is now just another company, rather than a trail-blazing retailer.

The earnings reports of the next few days should help shed light on whether that unflattering appraisal is correct.