Natural Food Retailers Are Cheap, Popular and Defensive

24/7 Wall St.

While the market is in the midst of intense selling, investors always look at defensive sectors like utilities, pharmaceuticals and consumer staples, as they tend to pay good dividends and are low beta. One group that sneaks in is the natural food retailers. Many families now will only buy their groceries from natural food stores. In a new research report, UBS makes the case that the stocks are way undervalued, and have plenty of room for growth. The natural foods retailers and wholesalers have underperformed the S&P by 10% year to date and are 25% below peak share price creating an attractive entry point.

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Here are the three stocks to buy now from UBS and one rated Neutral.

The Fresh Market Inc. (TFM) has had some solid insider buying. The company's CEO Craig Carlock recently made a strong 20,000 share purchase for $661,000. Two other directors of the company also purchased stock. There is no better indicator that a stock is cheap than solid insider buying, especial from the C suite level. The UBS price target for the stock is $45. The Thomson/First Call estimate is $39.93. The stock closed Thursday at $35.74 a share.

Sprouts Farmers Market Inc. (SFM) is another favorite name at UBS, which feels that the company's brand equity is at an inflection point that is driving new store revenues higher. The UBS team also feels that its earnings momentum may suggest that there is upside to current guidance. Sprouts also is well liked for its conservative guidance, which just assumed 7% to 8% same-store sales for 2014 despite last year's 10% growth. The UBS price target is $43, and the consensus target is $41.17. Sprouts closed Thursday at $35.61.

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United Natural Foods Inc. (UNFI) is a name that is liked at UBS, though it is only Neutral rated on a valuation basis. The UBS team believes many investors have rotated into the stock due to its solid momentum, reflecting the overall natural food industry's momentum. As a wholesaler, it sells to more than 30,000 retail locations and sells 65,000 different products. This has been an attractive feature for investors who believe in the long-term growth of natural foods but are unsure about which retailers or suppliers will ultimately win. The UBS price target is $69 and the consensus target rests higher at $76.50. Shares ended Thursday at $65.54.

Whole Foods Market Inc. (WFM) is considered the bellwether for the group, and it may provide investors with an outstanding entry point to the stock at current levels. Despite the fact that retail giant Walmart is throwing its hat in the organic ring, that does not change the fact that the stores' demographics are wildly different. The Whole Foods customer is extremely loyal and not as price conscience as typical grocery store customers. Investors are paid a small 0.9% dividend. The UBS price target is $70, and the consensus target is $59.67. Whole Foods closed Thursday at $49.61.

What was once considered venues where granola people and hippies shopped have now gone totally mainstream. Plus, the ongoing chatter in the media over the dangers of processed foods and chemicals has made a large part of the population devout organic buyers. While they may never cater to the majority of the nation's grocery shoppers, the three top UBS names have gathered a large enough and loyal enough following to bang out consistently strong earnings.

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