There's Big Green In Organic Food

Hold on to your Birkenstocks. The natural way of life is gaining ground--on Wall Street and at the grocery store. All you have to do is stroll past the produce aisle, the frozen food section, and the deli counter to see the new array of organic items on display. These no-pesticide, no-hormone products used to be limited to health-food stores. But today, major supermarket chains carry organic products ranging from tomatoes to enchiladas. With organic-food sales growing 20% to 25% a year since 1990--vs. 3% to 5% for the food industry overall--the time may be ripe to invest in companies that manufacture, distribute, or sell organic goods.

Reports in recent years about the possible cancer-causing effects of pesticides and chemical additives have raised consumer concern about conventionally cultivated food. Because of this, and the improved quality and lower prices of organic products as larger, more sophisticated producers have entered the field, industry analysts project wholesale revenues to hit $4.4 billion this year, 25% higher than in 1996. The industry should also benefit from federal standards for organic products that are set to become law next year. Only 17 states now have rules pertaining to organic products, and their rigor and enforcement vary. The credibility conferred by a USDA-certified organic seal on everything from meat to processed foods will encourage many more consumers to buy organic, says Frank Lampe, editor of Natural Business newsletter. "The organic sector has incredible potential," says Michael Burbank, a vice-president at Montgomery Securities in San Francisco.

BUYING SPREE. Several deep-pocketed investors agree. Trefoil Partners II, a group headed by Roy Disney, vice-chairman of Walt Disney Co., last year bought a controlling interest in Cascadian Farm, a producer of frozen organic vegetables and desserts. Meanwhile, Shansby Group, a limited partnership in San Francisco, took over Arrowhead Mills, the Hereford (Tex.) manufacturer of organic flours, cereal, and nut butters. And Natural Nutrition Group, owned primarily by a Chicago venture-capital firm, Frontenac, bought Health Valley of Irwindale, Calif., a maker of organic soups and baked goods. "When the smart money comes in, that's a telltale sign an industry is on the rise," Burbank says.

Although many players in the organic industry are privately held, publicly traded companies do exist--and analysts predict robust earnings in the next few years as the business takes off. "Being involved in this sector should be very profitable. The future prospects are very good," says Yudi Bahl, an analyst at Piper Jaffray in Minneapolis. Currently, Organic Food Products is the only one that sells organic goods exclusively. The manufacturer of salsas, pasta sauces, juices, and frozen entrees has been trading at around $4 a share since going public on NASDAQ in August.

Other investment opportunities can be had through companies that feature organics in their product line. Hain Food Group, which markets organic crackers and beans, along with low-fat and sugar-free items, is up to 91 1/16 a share from 3 at the beginning of the year. On Sept. 8, the company, which is 15.7% owned by financier George Soros, announced plans to acquire publicly held Westbrae Natural Foods, a maker of organic snacks, soy products, and canned goods.

SALAD DAYS. It's also possible to invest in retailers and distributors of organic products. Although most major grocery chains are dedicating more shelf space to organic goods, none can match the commitments of Whole Foods Market and Wild Oats Markets, headquartered in Austin, Tex., and Boulder, Colo., respectively. Both are pursuing aggressive acquisition and expansion strategies. Shares of Whole Foods--which operates 74 stores under the names Whole Foods, Bread & Circus, Wellspring Grocery, and Fresh Fields--are up 52% this year, and Wild Oats stock has risen 49%. United Natural Foods, a national distributor of organic foods, has also done well. Since its initial public offering a year ago, its stock price has appreciated 65%.

Investing through a venture-capital fund or through a private placement--usually at a minimum of $100,000--is another way to go. Venture Strategy Group and Rosewood Capital, both of San Francisco, have funds that invest in the organic- and natural-foods industries. Also, the Organic Trade Assn. (413 774-7511) makes available the names of companies in search of investors. Analysts predict that the organic industry will maintain or exceed its current growth rate for the next 5 to 10 years at least. Talk about a healthy trend.

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