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Bull of the Day

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 Day.

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.

Company Description

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.

Recent History

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 or more.

The company reports again February 27 after the close with the Zacks Consensus Estimate calling for $0.06 of EPS on revenue of $588M.

SFM Estimates

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 estimate stands.

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 level currently.

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. It’s not a complete arbitrage strategy, but it is close.

Valuation

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.

The Chart

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 Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.

Follow Brian Bolan on twitter at @BBolan1

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