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Sprouts Farmers Market (SFM - Snapshot Report) is a grocer
that is looking to eat the lunch of an industry that seems to be
on a race to the bottom. With Target and Walmart getting into the
space, SFM is looking to a store layout that best suits the needs
of its shoppers and leverages the local supply chain as well. It
is a Zacks Rank #2 (Buy) and it is the Bull of the
Your Best Grocery Option?
One of the reasons this stock caught my eye was the options
action. I even went ahead and did a screen shot of the action to
help everyone understand what I saw. The March 35 calls were
seeing a huge amount of contracts coming in when there was
basically no or tremendously light open interest. This means the
buyer is paying nearly $3 for the $35 call and they expect the
stock to be $38 in mid-March. That is a good sized move from
right here, so following this big fish isn't that bad of an idea.
SFM is a grocer just like Whole Foods - but I like this idea
better as they are not about the mega box stores. They are
located primarily in the south west, and I grabbed this map of
their stores from their site.
The map does not include the two GA stores... but they are in
expansion mode. As of December 23, 2013, the company had 165
stores in Arizona, California, Colorado, New Mexico, Nevada,
Oklahoma, Texas, and Utah. Sprouts Farmers Market, Inc. was
founded in 2002 and is based in Phoenix, Arizona.
When we look at the earnings history, we really are not going on a
lot of data. They are a recent IPO and have only one report as a
public company under their belt. That report was a beat of the
Zacks Consensus Estimate of $0.10 by $0.03 or a 30% positive
earnings surprise. Revenue also came in $11M ahead of
expectations. Despite the beat, the market sold the stock to the
tune of -4.9% in the session following the release.
The main reason the stock was lower in session following the
release was that the company filed for a 22.5M share offering.
That has a way of taking the spot light off the beat and puts more
focus on the long term holders. Apollo Group was the big seller
and the company did not receive any proceeds from the sale.
In mid-December we saw a number of brokers start coverage of the
company. Sun Trust Robinson Humphrey initiated with a Neutral,
Credit Suisse reinstated a Neutral rating and BofA/Merrill
upgraded the stock from underperform to Neutral. So not the best
of ratings, but there is still room for future upgrades from
nearly all the covering analysts.
By late January the company had its IPO lock up expire and the
stock had basically slid from ~$40 to the $35 level in
expectations of a lot of sellers. Since the lock up expired the
stock has remained pretty flat around $35, but the volume has
increased a bit, yet only one recent day saw volume of 1M shares
The company reports again February 27 after the close with the
Zacks Consensus Estimate calling for $0.06 of EPS on revenue of
Earnings Estimates for SFM have inched higher since their release
in September of last year. At that time the Zacks Consensus
Estimate for 2013 stood at $0.45. In November it was kicked higher
by a penny and then one more cent in December. That is where the
The 2014 Zacks Consensus Estimate opened at $0.56 in September and
then moved higher to $0.60 in December. It still stands at that
Not So Short of Interest
Lately I have been keying in on stocks that could see a big short
squeeze. At this point, due to the young age of the company, I do
not think this is a good squeeze candidate. The graph below shows
how shorts have been amassing a position over the last several
months. This tends to happen with most IPO's and the big
acceleration continues when there is a secondary, as some
investors that expect to be "buyers" of the secondary offering
will short large quantities and then release the underperforming
side of the trade as the stock is placed. Its not a complete
arbitrage strategy, but it is close.
The valuation is where investors might give me a little push back.
The trailing PE of 176x is obscene compared to a 20x industry
average, and almost as bad is the 59x forward PE multiple when
compared to a 15x industry average. The price to book multiple of
10x is also well ahead of the 2.5x industry average, so the value
players are going to be scared to death of this name. Even price
to sales carries a big premium, with 2.3x for SFM compared to an
industry average of 0.5x. So why would anyone be a buyer with that
valuation? Well the company is expecting revenue growth of 17% in
2014, and that is almost triple the 6% the broader industry is
looking for. The expected earnings growth of 31% is about 2.5x the
13% that the broader industry is looking for.
So you are paying up for growth... but this is growth that is
coming from store expansion and of course the inflation of
commodity food prices. So there is a little bit of an awareness
factor, store growth and price growth all going to be pushing
revenue numbers higher. This is the type of stock that Lone Pine
Capital loves... so don't be surprised by a 13G from Steven Mandel
in the coming year for SFM.
This stock is still pretty new to the market, so a price and
consensus chart doesn't make that much sense. Instead, I have a 6
month chart that shows how the stock got a little ahead of itself
in late October. Recently, the stock has come back to earth, but
the growth expectations and an improving earnings picture should
plant a seed of long term growth in your head.
Brian Bolan is a Stock Strategist
for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor
service, a Buy and Hold service where he recommends the
stocks in the portfolio.
Brian is also the editor of Breakout Growth
a trading service that focuses on small cap stocks and
a risk limiting strategy. Subscribers get daily emails along
buy, and sell alerts.
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