Distinguishing Fad From Trend In Gluten Free And Stevia Markets May Expose Profitable Investment Opportunities

Includes: BNNY, DANOY, GIS, K, KO, PEP
by: Glen S. Woods

Our society has seen fad diets come and go, and fortunes made and lost investing in the next food or diet fad. For example, Krispy Kreme (KKD) got hammered in part with its expansion just before the Atkins low carbohydrate diet craze took its toll on breads and other wheat products. The low carbohydrate fad caused food manufactures like General Mills (NYSE:GIS) to scurry to market a line of low carbohydrate products until the fad ended. So the question arises pertaining to the longevity of the two popular diet and health products of today -- gluten free and stevia. Does either have staying power, or will both be the next health food fads that will soon find their way to the discount aisles?

Gluten free foods are popping up everywhere. Therefore, companies desiring to stay competitive have no choice but to jump on the bandwagon as they did with the Atkins craze. General Mills advertises it now manufactures over 300 gluten free products from its Betty Crocker® chocolate chip cookie mixes to Chex® cereals. Not to be outdone, last year Kellogg Company (NYSE:K) -- which earlier claimed it had little interest in adding gluten free products -- reversed course and added a line of gluten free cereals, including certified gluten free Rice Krispies made with brown rice. However, as seen with the Atkins craze, just because the giant companies are adding these products to their product lines does not mean that it is not a fad. Though one never knows what product has staying power, the answer might be found in the numbers. Gluten free diets were originally developed for a small segment of the population with Celiac disease, where their bodies are unable to tolerate gluten. According to the market research firm Mintel, Americans will spend roughly $7 billion on gluten free food, but probably more than half these people don't have any clear-cut reaction to gluten. The numbers get worse when one realizes that there are 311 million people in the U.S., and roughly 1.8 million of these suffer from Celiac disease. Additionally, perhaps another 1.4 million have the disease and don't know it. That's just over 3 million people or 1% of the population -- hardly enough to turn gluten free anything more than a fad for those other than Celiac sufferers.

Annie's Inc. (NYSE:BNNY), which carries a national brand of healthy and organic foods, has jumped into the gluten free business by advertising gluten free pastas, macaroni and cheese, and salad dressings. Though the gluten free craze will help bolster Annie's sales in the near term, the problems comes after the fad ends. Unlike General Mills and Kellogg, which will not likely be as affected by a drop-off in popularity of gluten free products due to their expansive non-gluten free product lines, a company like Annie's will probably be affected negatively. However, a closer look at the company shows it's not the gluten free products that Annie's carries that would be of the most concern, it's the company's valuation. At this time, Annie's is benefiting from the natural organic food boom and the gluten free fad to bolster its sales. The question that remains is once the gluten free fad ends -- if it is indeed a fad -- or other major food manufactures develop more health conscious food products that will challenge Annie's, how long will it take for the stock to drop further? It's a positive sign that Annie's posted a profit of $3.8 million in the September quarter, up from a profit of just $107,000 in the second quarter for the previous year. It also posted sales of $46.7 million in the quarter, up from sales of $38.9 million a year ago. Annie's went public on March 28, 2012 with an IPO price of $19 per share, then soared to a September high of $48.87 per share before dropping almost 20% in the last month to trade in the mid $30s. Even with the drop, Annie's still has a market cap of $609 million and a P/E ratio of 54 -- very high considering the industry sector average is 21.1. Additionally, Annie's doesn't manufacture anything in house -- it relies on vendors to manufacture its product line. And if a larger company has an interesting in buying it out, other than good will, what assets does Annie's really have to support its valuation? Though I like the company's social consciousness, as an investment, I think Annie's is valued far too highly for a company that doesn't manufacture anything -- and gluten free fad or not, Annie's seems well overbought.

Now, let's look at stevia. Stevia is an all natural, zero calorie sugar substitute that can be up to 400 times sweeter than sugar and seems to be more of a growing trend than a fad. It has been found to lower blood sugar and reduce blood pressure, and it has antibacterial properties that fight cavities and gingivitis. It may also help improve insulin production, helpful for people fighting diabetes. The stevia plant also contains a number of antioxidants, which help the body fight off the damage caused by free radicals. Stevia products have already found their way into the product line of beverage giants like Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), and food processing conglomerates like Cargill and Kraft (KRFT). Smaller companies like So Delicious Dairy Free, which has a line of stevia based frozen deserts, have also embraced this natural sweetener.

Though stevia has found it way into the products of mainstream giant food producers, it has been shown that although the large food companies create a line of a popular products, it does not guarantee that the product is not still the latest fad. However, looking strictly at the numbers, stevia appears not to be a fad but a serious threat to artificial and natural sugar free substitutes like Xylitol, Splenda and aspartame. The reason can be found in the numbers. There are 28.5 million people in the U.S. who suffer from diabetes, and it is projected that there will be 7.9 million new cases each year, indicating the sustainability of stevia's possible continued growth. If that isn't bad enough, add that obesity has become an epidemic in America, where 35.7% of the adults are overweight. It's estimated that those percentages could rise to 50% by 2030. Considering that there were about 311 million people in the U.S., according to 2011 Census Bureau figures, that's 111 million people that will be overweight in the U.S. alone. When you factor in likely steady population growth, that number will likely be a lot higher in 20 years. The amount of sugar American's consume is one of the main factors in the explosion of diabetes and obesity. In theory, if we lower the amount of sugar consumed, diabetes and obesity levels should decline. But Americans are hooked on sugary sweets like sodas, ice cream and candies, and as history has shown so far, people are not quite ready to give up their sweet pleasures. Therefore, a natural zero calorie sugar free substitute like stevia could be the answer.

Last year, Londonberry, NH-based organic dairy producer Stonyfield Farm -- a subsidiary of the French food conglomerate Groupe Danone (OTCQX:DANOY) -- added an organic stevia and sugar blend to its 100 calorie fat free organic yogurt. The product has 30% less sugar than the original recipe, and as the company put it, "yogurt lovers who crave a light option with no artificial sweeteners finally have a tasty yogurt for them." Though Stonyfield Farm is small compared to the larger yogurt brands that line the market shelves, if its stevia line proves to be successful, it would be no surprise to see larger yogurt brands owned by Groupe Danone -- such as Dannon or Activia -- add stevia to sweeten their products. Stonyfield Farm, which also owns yogurt brands Brown Cow and Oikos Organic Greek Yogurt, is a growing company. However, although Stonyfield Farm is part of the $37.83 billion market cap Groupe Danone, which is a very stable company, I do not see much growth in the near future. However, there are other companies that may grow with the rising need for stevia. Interestingly, when Stonyfield Farm was looking for a source for organic stevia, it found what most food companies have discovered -- a need for a consistent supply of quality stevia. Stonyfield Farm found only one supplier or organic stevia, and that was in China. That alone shows that there is a need for stevia growers, especially in the U.S., and companies are starting to develop farms and processing plants to meet the void of food companies looking for a consistent supply line of quality stevia. One small company out of the central valley in CA is attempting to fill that void.

Stevia First Corp. (OTCQB:STVF) plans to be not only the first U.S.-based organic stevia farm, but also the most technologically advanced grower with its non organic fermentation method for extracting the steviol glycoside from the cheap stevia plant material. Stevia First is still in the development stage, so it is not producing stevia at an industrial level at this time, however, it is researching and developing two methods of growing stevia. The fermentation method is the most interesting, because not only will it cut the costs of growing and extracting the steviol glycoside by roughly 70%, the process should enable Stevia First to focus on producing high quality steviol glycoside with higher sweetness levels than previously grown products. That means that its customers would require less steviol glycoside to sweeten their products, thus saving money on their product lines that contain stevia. The fermentation process will also be able to ensure a consistent stream of product that should not vary from batch to batch as farm grown stevia tends to. If Stevia First Corporation gets its fermentation process running on an industrial level with its lower cost and higher steviol glycoside output, it is quite conceivable that its product would be in great demand from the giant bottlers as well as food manufactures.

While the organic stevia product has the capability of being very successful with the growing demand for organic products, I see the most potential in the fermentation method once it is operational on an industrial scale. This process is where I believe the real money can be made, and if the fermentation method proves successful, Stevia First might be primed for a large company to buy it out. Being a small development company, the stock has bounced up and down depending on news or lack of news, which accounts for its rise earlier this year to $2.75 per share and back down into the mid $0.20s. Today, the stock trades in the low $0.40 range. The company recently secured $500,000 in financing to move forward and expand on its research and development operations. Part of the terms of the recent financing deal was a lock up period. As such, over 50% of the company's shares may not be sold until 2014. This is a positive development for those considering an investment in Stevia First Corporation. Though any small development company is a high risk investment and one should do their research before investing, Stevia First appears to have a much higher upside potential for a pure stevia play, especially if its fermentation based process is successful and the giant bottlers or producers take notice.

Gluten free foods may well be a fad -- the question is has it peaked or does it have more room to grow before it potentially busts? On the other hand, Stevialooks to have staying power, and it is only starting to grow in popularity. Therefore, stevia is still in its early stages as a mainstream product, and stevia growers and producers continue to develop new strains of sweeter tasting stevia. Though it is doubtful that stevia will come close to matching sugar sales, it has a great chance of being the sugar free sweetener of choice and overtaking the artificial sweeteners in sales. As an investor looking for profits on companies using stevia, I don't see it having much affect on the large companies such as Coca-Cola and Pepsi. However, the smaller companies that are focusing on growing or producing stevia, like Stevia First, have a lot of room for growth and may see their stocks benefit from the expanding stevia market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.