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Forget Whole Foods, Buy These 4 Little-Known Stocks Instead

Michael Vodicka

Coconut water powder for a health drink... Gluten-free pizza crust... Sustainably poled and trolled tuna from the U.S. Pacific Northwest... These may sound like the forgotten dreams of flower children, but on the Street, organic food is the fastest-growing segment of the global grocery market.

And investors who ride the wave could see impressive profits from this trend.

For example, while domestic food sales continue to grow at an anemic pace of about 1% annually, the organic segment is experiencing explosive gains. Organic food sales are on pace to reach $42 billion in 2014, a 31% increase from $29 billion in 2010. Globally, the trend is just as strong, with organic food sales expected to top $100 billion by 2016. More than half of this demand is expected to come from the United States and its 40-plus million organic customers.

These are the same forces that have lifted Whole Foods (WFM) to a market-smashing gain, up 2,800% since going public in 1992.

There are powerful social forces driving the trend.

Today, many consumers prioritize health over price. Concerns about toxins, chemicals and fertilizers have many consumers choosing the organic route, a process that eliminates the use of synthetics. These people also express concerns about sustainability, worried about the effect of depleting the environmental resources involved in bringing fish, meats and various agricultural products to market.

The last factor driving the organic trend is a matter of health and fitness. Centers for Disease Control statistics show that from 2009 to 2010, 33% of the domestic adult population was overweight, with 37% qualifying as obese. While still high, obesity figures have steadied in recent years. Health is increasingly becoming a priority.

As you can see, it's no coincidence that the organic-food industry is in for a period of huge growth.

But if you missed the insanely huge gains that Whole Foods provided investors, then don't worry.

History is about to repeat itself.

That same cycle that lifted early investors in Whole Foods to huge gains is again developing. Here are four small-cap organic-food stocks in position to cash in.

From the list, I'm particularly attracted to The Hain Celestial Group (HAIN) and The Fresh Market (TFM) because of their growth projections and attractive valuations.

1. The Hain Celestial Group Inc.
Hain Celestial manufactures and distributes organic food to grocery stores and retail outlets. The company's market cap of $2.5 billion is a fraction of Whole Food's $16 billion, positioning Hain to produce big gains for early investors.

Shares saw an 82% return in the last two years, compared to the S&P 500's near 19% gain. Analysts are looking for another great year, calling for earnings growth of 13% in 2013 and another 17% in 2014. Hain's five-year growth projection of 15% outpaces the industry average of 12%. With a price-to-earnings/ growth (PEG) ratio of just 1.35, below its peer average of 1.55, Hain offers growth and value for investors looking to cash in on the organics revolution.


2. The Fresh Market Inc.
The Fresh Market is a grocery store owner and operator. Although shares recently pulled back about 30% from its all-time high of almost $66, this is another stock in position for big gains.

Analysts are calling for earnings growth of 27% in 2013 and another 25% in 2014. The five-year outlook is just as bullish, with analysts calling for 23% annual growth, easily beating the industry average of 10%. Fresh Market also looks undervalued, trading with a PEG ratio of 1.2, its all-time low and well below its 10-year average of 1.6.

Risks to Consider: Although organic food shoppers tend to be higher income and less vulnerable to economic fluctuations, high-priced food items are vulnerable to slower consumer activity. Higher input costs for organic food companies are also a potential threat to margin strength.

Action to Take --> The organic food space is red hot right now. That trend is only expected to strengthen in the next four years, as consumers become increasingly sensitive to social and health issues. From the four stocks I highlighted, I particularly like Hain Celestial and The Fresh Market because of their bullish growth projections and attractive valuations.