The food industry is often thought of as a stable industry due to the consistent demand for food and beverage products. Now, if you’re looking for some diversification or to invest in a stable industry with some growth potential, you might want to consider small-cap food stocks. That in mind, there are only a few small-cap food stocks out there, but we’ve narrowed down the list to three food stocks that some investors and traders might want to consider.
Food Industry Explained
Again, the food industry is typically a relatively stable industry that should not be affected as much as other stocks in times of economic downturns. That said, small-cap food stocks could be attractive to market participants who are looking for both stability and growth. Small cap food companies distribute, manufacture and market an assortment of foods and beverages, ranging from coffee and juice to cookies and fresh foods. Now, small cap food stocks provide a unique opportunity that provide growth potential, coupled with diversification and stability. Let’s take a look at some of the top small-cap food stocks that market participants might want to consider for the second half of 2017.
Nutraceutical International Corporation
Nutraceutical International Corporation (NASDAQ: NUTR) is a small-cap food stock that manufactures, markets, distributes and sells nutritional supplements and other natural products. The company’s product offerings include functional foods, herbs, vitamins and other products. Nutraceutical also offers its products to natural food and domestic health stores. Some of Nutraceutical’s competitors include Sprouts Farmers Market, Nature Made, Natural Grocers and United Natural Foods, to name a few.
According to Nutraceutical, “Our singular focus on execution of our long-term strategy for growth is important not only for our customers, but also for our investors.”
Moving on, let’s take a look at some of the reasons why Nutraceutical could potentially be a top small-cap food stock during the second half of 2017.
First, let’s examine some of its valuation ratios, in relation to its industry. According to Morningstar, Nutraceutical International Corporation had a trailing 12-month price-to-earnings ratio (P/E) of 20.8, while the packaged foods industry had an average P/E ratio of 28.8. NUTR had a price-to-book ratio of 2.1, while the industry average was 2.8. Additionally, Nutraceutical had a trailing 12-month price-to-sales ratio (P/S) of 1.6, while the packaged foods industry average was 1.9. That in mind, the stock would be considered undervalued, based on these ratios.
Not only that, but the company has shown attractive growth rates in its revenue and net income over the past three years, in relation to the industry average. As of June 2017, the company had an average annual revenue growth rate of 3.8%, while the industry average was 1.4%, over the past three years. Additionally, the company grew its net income at an average annual rate of 3.1%, while the industry average was -2.7%.
Now, the stock has been building some momentum in the first half of 2017. As of June 16, 2017, NUTR was up over 40% in a one-month period, 26.64% over a three-month period and it’s up over 70% over the past year.
Check out NUTR on the daily chart below.
Now, the reason for the gap up was due to the announcement of the company entering into a definitive agreement to be acquired by HGGC for $41.80 per share. That in mind, the reason for HGGC’s decision to acquire the company may be due to its strong fundamentals and since it’s considered undervalued at these levels still.
Moving on, let’s take a look at another undervalued food stock that investors might want to consider, which could be a potential acquisition target.
Cal-Maine Foods Inc
Cal-Maine Foods Inc (NASDAQ: CALM) is another food stock that some investors and traders might want to consider, based on its valuation ratios and recent performance. Cal-Maine Foods is one of the largest producers and markets of shell eggs in the U.S. Now, the company operates in just one segment, and produces, grades, packages, markets and distributes shell eggs. Now, in the 2016 fiscal year, there was an increasing number of large restaurant chains and food service customers, as well as major retailers that committed to exclusive offerings of cage-free eggs by specified future dates, according to the company. Now, the prices for specialty eggs are not as cyclical as non-specialty shell egg prices. The company markets its specialty shell eggs under some major brands, such as Land O’ Lakes, Egg-Land’s Best, Farmhouse and 4-Grain.
Now that we’ve got some background on the company, let’s take a look at its valuation ratios and some growth rates. According to Morningstar, Cal-Maine Foods has a price-to-book ratio of 2.1, while the industry average is 2.8. Additionally, it had a trailing 12-month price-to-sales ratio of 1.6, while the industry average was 1.9. More importantly, the company has shown that it has the ability to grow its revenue and earnings. The company was able to achieve an average annual revenue growth rate of 14%, while the industry average was 1.4%, over the past three years. Moreover, it grew its net income at an average annual rate of 84.4%, while the industry’s average net income contract by 2.7%, over the past three years.
The stock has sold off recently, and it could be considered undervalued at these levels, based on its valuation ratios. Here’s a look at the daily chart below.
The Bottom Line
Small-cap food stocks could provide a way for investors to diversify their portfolios, while still providing immense upside potential. Now, there are only a few small-cap food stocks out there, but they’re relatively stable, in relation to other industries, such as biotech or tech stocks. There is typically demand for food and beverage products, which should fuel revenues and earnings of small-cap food stocks. Now, Cal-Maine is one food stock that is poised to rise since its undervalued, and it could potentially be an acquisition target. We’ve seen HGGC and Nutraceutical enter into a definitive agreement, and we could potentially see a more mergers and acquisitions (M&A) activity in the small-cap food stocks space.