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This is a continuation of my quest to go through all 100 stocks from the 2013 Forbes Best Small Companies list. Upon first glance, if a stock is interesting but overpriced, I provide a quick rundown. Otherwise, if I come across something I like and the price is right, a full analysis and valuation report is provided.

My quick filtering method is simple and the same with every stock I look at.

  1. Just enter the ticker into the OSV stock analyzer
  2. Take a quick look at the valuation ratios
  3. Perform a quick reverse DCF

Just by doing this, I can decide whether to continue investigating or move on to the next.

The Forbes Criteria

For new readers, the methodology used by Forbes in coming up with the list is quite simple.

  • strong sales and earnings growth
  • publicly traded for at least a year
  • generates annual revenue between $5 million and $1 billion
  • stock price no lower than $5 a share
  • excluded financial institutions, REITs, utilities and limited partnerships

Annie's (BNNY)

One of the companies profiled in this years list is Annie's (BNNY), a natural and organic food company. Riding the hot trend of organic and natural food, Annie's went public in 2012 and is up 35% for the year. You can find their products in mainstream retailers like Target (TGT), Wal-Mart (WMT) and Costco (COST), as well as natural food stores such as Wholefoods (WFM) and Trader Joe's.

Annie's Products

The Good

Annie's has achieved success by innovating in the food industry and being one step ahead of trends. For the full details you can read the Forbes article which goes deeper into the history of the company. As an example, Annie's noticed that whole grain was becoming "hot".

In 2010 we knew that whole grain was getting more attention, and so we updated our cookie products to include 8 grams of whole grain per serving

And now, with natural ingredients being all the rage and people willing to spend extra for higher quality perceived products, Annie's has been growing at a nice rate. If your style of investing involves getting in on a booming industry, then watch out for Annie's.

The Bad

The main problem is obvious-- competition. It is crazy in the food industry because the barriers to entry are non-existent.

I've attended a few food and gift trade shows and the number of small businesses selling organic or natural food items is astounding. It seems like every second booth at a show has some form of organic and gluten free food.

Annie's' CEO acknowledges it himself.

"I live in a state of paranoia," he says of competitors that nibble like piranhas at his "healthy" food products. "I'm as obsessed with the big CPG companies as I am with the up-and-coming brands"-Kraft Foods on one side, smaller consumer packaged goods like Back to Nature Foods on the other.

The Numbers


(click to enlarge)

Valuation Multiples for BNNY

The PE is expensive, the cash adjusted PE is expensive and even the EV/EBITDA is expensive at 32. Just how expensive? A quick reverse DCF shows that using a TTM FCF value of $9.8m and 9% discount rate, the expected growth rate is 34%. Look at the sensitivity matrix below. The current stock price is priced for perfection. If Annie's grows at 32% instead of 34%, the intrinsic value drops to $39.55. That's quite a drop for missing growth by just 2%.

(click to enlarge)

DCF Sensitivity Matrix

Upon a quick run through, the stock price requires Annie's to continue growing, gaining market share and penetrating more natural food stores. It also needs to continue meeting high expectations. But Annie's is a company that I will keep an eye on with interest.

Disclosure: None

Source: The Next Investment Trend - Organic And Natural Food Industry