It’s not surprising that spending at grocery stores spiked during the pandemic with people staying at home and many unwilling to go to restaurants. However, it is surprising that spending at grocery stores has remained elevated relative to the pre-pandemic period even with the economy normalizing.
While rising inflation has been a struggle for many businesses, grocery stores are an exception as evidenced by their strong earnings reports and rising margins. So far, they have been able to pass on rising costs to customers, and this trend is likely to continue given a strong labor market and rising wages, especially for those in the upper quartile of incomes.
National Grocers by Vitamin Cottage (NGVC) is a grocery store that is thriving amid these economic conditions especially as it appeals to a demographic that is unaffected by inflation. On top of this, it has its own organic growth story as the company is in expansion mode.
Read on to find out why NGVC is my growth stock of the week…
NGVC is a Colorado-based health food chain specialized in the retail of natural and organic groceries, dietary supplements, and natural body care products. It offers a variety of private label products like pet care and food products, Household, and General Merchandise. It has 162 stores in 20 states.
Its growth has been impressive as over the last decade its store count has nearly tripled. Its recent earnings report showed its huge growth during the pandemic. Equally impressive, it held onto these gains as it had 3.8% same-store sales growth compared to last year and 16.5% compared to 2 years ago.
The biggest reason to like NGVC is its exposure to a growing category – organic food. The organic food market is projected to grow at nearly triple the rate of the overall grocery industry over the next decade. Millennials and Generation Z shoppers are more likely to prioritize buying organic food than older generations.
Another catalyst for NGVC is that the company is in growth mode as it has added stores at about a 5% rate over its last decade. This slowed due to the pandemic in the past 2 years but it should return to trend in the coming years. Operating margins have also gone from 3% to 5%, and there is more upside as the company introduces more private-label products.
This combination of expanding margins, same-store sales growth, and the addition of new locations is a potent combination that foreshadows strong stock market gains.
Despite this growth potential, NGVC is cheaper than the S&P 500 with a P/E of 17 vs 25. It also pays a higher dividend at 2% vs 1.3%. In 2022, analysts are forecasting a free cash flow of $33 million which gives it a forward P/FCF of 14.6 which is quite reasonable considering favorable sector dynamics and the company’s growth due to organic food sales and new locations.
This combination of growth and value in addition to operating margins increasing by 60% is a unique and bullish circumstance. Therefore, it’s not surprising that the stock has an overall A rating, which translates to Strong Buy in our proprietary ratings system.
The POWR Ratings assess stocks by 118 different factors, each with its own weighting. A-rated stocks have posted an average annual performance of 31.1% which handily beats the S&P 500’s 8.0% average annual gain over the same period.
The POWR Ratings also evaluate stocks by different components to give additional insight on each stock. NGVC has strong component grades across the board including a B for Growth and Value. NGVC is part of the Grocery – Big Box/Retailers sector which is rated an A due to rising revenues and growing margins. Within this group, NGVC is the #2 ranked stock out of 39. Click here to see NGVC’s complete POWR Ratings.
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NGVC shares were trading at $19.47 per share on Monday morning, down $0.36 (-1.82%). Year-to-date, NGVC has gained 37.44%, versus a -3.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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