We recently compiled a list of the 10 Best Grocery Stocks To Invest In Now. In this article, we are going to take a look at where Sprouts Farmers Market Inc. (NASDAQ:SFM) stands against the other grocery stocks.
Food prices, along with energy prices, tend to be historically volatile, which is why they are excluded from the core Consumer Price Index (CPI) reading published by the U.S. Bureau of Labor Statistics each month. Thus, when the CPI rose by a seasonally adjusted 0.2% in September, resulting in an annual inflation rate of 2.4%, it didn’t provide much insight into grocery price trends specifically. Annual food inflation climbed to 2.3% in September, up from 2.1% the previous month, marking the largest rise since August 2022. This increase follows a shift in wholesale food prices, which stopped declining early in the year and began to rise again, according to the Food and Agriculture Organization’s (FAO) Food Price Index.
While analysts and supermarket executives point to supply chain disruptions and rising labor costs as the main causes of food inflation, many point out that they often overlook accusations that corporate greed has led to unprecedented revenue levels that unjustifiably exceed profit margins. However, others disagree with this sentiment. One such person is Arun Sundaram, an analyst at CFRA, who states that growth in the grocery sector is driven by strong consumer demand rather than corporate greed:
“While food prices have risen by about 30% since 2019, costs have also increased substantially during this period. Therefore, the key metric to focus on is gross margins, which have remained stable relative to pre-pandemic levels. Moreover, the producer price index has tracked closely with the consumer price index, indicating that the price hikes on the shelves are cost-justified price increases.”
See also: 7 Best Delivery Stocks To Invest In Now.
Given the surge in prices for essential food items and the record-high revenues for retailers, it’s no surprise that stocks in this sector are not only performing well but, in some cases, outperforming the overall market. Additionally, although grocery stocks aren’t immune to recessions, they have shown notable resilience, largely due to consumers’ consistent need to shop for essentials, making grocery stores a frequent destination even during tough economic times.
Grand View Research reports that the global food and grocery retail market was valued at $11.93 trillion in 2023 and is projected to grow at a 3.2% compound annual growth rate (CAGR) from 2024 to 2030. Packaged foods lead the grocery market by product type, holding the largest market share due to their convenience and broad selection. In that same vein, while traditional in-person shopping remains the consumer preference, the online grocery sector is rapidly expanding. Valued at $50.28 billion in 2022, the sector is expected to reach $57.81 billion by 2030, growing at a CAGR of 26.8%.
In any case, people buy groceries consistently, regardless of economic conditions, and their purchasing levels remain fairly stable in both prosperous and challenging times. This makes the grocery industry, a segment of the broader consumer staples (also known as consumer defensive) sector, relatively resistant to disruption. These ‘defensive’ stocks compensate for modest growth with low price volatility, steady profits, reliable dividends, and a strong defensive position. That said, Morgan Stanley equity strategist Michael J. Wilson believes such stocks have rallied recently, making them pricier relative to their earnings. While defensive stocks often perform well following Federal Reserve rate cuts—which could be favorable after the aggressive half-point rate reduction in September—Wilson states that they also tend to lag initially:
“Historically, defensives see fairly persistent outperformance 3-12 months following the Fed’s first cut, but can see initial, modest underperformance in the 1 month following the initial rate reduction.
Recently, investors have shown heightened interest in defensive sectors, particularly within consumer staples, outpacing other areas like real estate and financials. Commenting on this trend, Bank of America strategists noted in a September report:
“The US consumer is reacting to the softer labor market, exhausted pandemic savings, and high interest rates. Signs of this reaction are visible across many angles, including the degree of outperformance in staples versus discretionary stocks.”
Morgan Stanley’s Chief U.S. Equity Strategist, Mike Wilson, also remarked:
“Lately, the market has skewed much more defensively as it has worried more about growth and less about high inflation or rates. Since the spring, the relative performance of defensives over cyclicals has been the strongest since the last recession ended.”
Our Methodology
For this list, we reviewed reports and financial media compilations and identified companies in the grocery industry. From this selection, we chose 10 companies that were the most popular among elite hedge funds, as of Q2 2024. The stocks are sorted in ascending order based on the number of hedge funds with stakes in each.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small-cap and large-cap stocks every quarter and has delivered a 275% return since May 2014, beating its benchmark by 150 percentage points (see more details here).
A bright, colorful display of fresh produce in a grocery store.
Sprouts Farmers Market Inc. (NASDAQ:SFM)
Number of Hedge Fund Holders: 35
Sprouts Farmers Market Inc. (NASDAQ:SFM), based in Arizona, operates a supermarket chain specializing in a diverse selection of gluten-free, natural, and organic foods. Emphasizing quality, freshness, and affordability, the company offers a wide selection of produce, bulk foods, meat, seafood, and prepared foods.
For the third quarter, Sprouts Farmers Market Inc. (NASDAQ:SFM) reported earnings per share of $0.91, up 39% year-over-year, surpassing the consensus estimate of $0.77. Revenue reached $1.946 billion, marking a 14% increase from the previous year and beating forecasts by $70 million. The company’s comparable store sales also grew 8.4%, well above the expected 4.5%, highlighting the growing appeal of Sprouts’ unique market strategy.
Following the Q3 report, CFRA raised its price target for Sprouts Farmers Market Inc. (NASDAQ:SFM) to $136 from $109, maintaining a Hold rating. Despite the positive results mentioned above, the company faced pressures on SG&A expenses due to heightened investments, increased incentive compensation, and higher e-commerce fees. Looking ahead, CFRA anticipates another strong growth year in 2025, with comparable sales expected to exceed 4% and EPS growth potentially surpassing 20%, assuming current investments will conclude by then.
FPA Queens Road Small Cap Value Fund stated the following regarding Sprouts Farmers Market, Inc. (NASDAQ:SFM) in its Q2 2024 investor letter:
“Sprouts Farmers Market, Inc. (NASDAQ:SFM) is a natural grocer with great merchandising and best-in-class gross margins.19 The company has attractive returns on capital, great new store economics, and they are accelerating their unit growth from 12 stores a year to 35 stores in 2024 on a base of roughly 400 stores. Over the past year, the stock has performed well after reporting strong operating results and from a low initial valuation. The stock price jumped when the company reported 2023Q4 results and gave strong 2024 guidance on February 22, 2024. We have maintained our position and allowed it to appreciate. Although SFM’s share price has increased faster than bottom line results, we believe SFM still trades in the “range of reasonableness” for a high-quality, non- cyclical franchise that can reinvest capital at attractive rates of return.”
Overall SFM ranks 8th on our list of the best grocery stocks to invest in now. While we acknowledge the potential of SFM as an investment, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SFM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.