- The company has excellent near and long term earnings growth potential.
- The company is considered to be a growth company therefore the stock has expensive valuations.
- The stock is indicated bearish technical.
Sprouts Farmers Market, Inc. (NASDAQ:SFM) is a specialty retailer of natural and organic food focusing on health and wellness while offering fresh produce, bulk foods, vitamins and supplements, grocer, meat and seafood, baker, dairy, frozen foods, body care and natural household items.
On February 27, 2014, the company reported fourth quarter earnings of $0.07 per share, which was in-line with the consensus analysts' estimates. The company IPO'd back on 02Aug14 and is down 5.39% since that time while the S&P 500 (NYSEARCA:SPY), which has gained 7.87% in the same time frame. I've already purchased a batch of the stock for my growth portfolio and am down 1.60% on the batch. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if right now is a good time to purchase more of the stock for my portfolio.
The company currently trades at a trailing 12-month P/E ratio of 111.62, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 47.68 is currently expensively priced for the future in terms of the right here, right now. The 1-year PEG ratio (3.61), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 30.92%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 30.92%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 25.96%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of but is sporting return on assets, equity and investment values of 3.9%, 12.7% and 5.9%, respectively, which are all respectable values. In this particular instance, I will forego the dividend aspect of the financials because the stock is in my growth portfolio; and in the growth portfolio a stock does not have to have a dividend.
Looking first at the relative strength index chart [RSI] at the top, I see the stock teetering around middle-ground territory with a current value 54.02. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is about to cross below the red line with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($37.95), I'm looking at $41.29 to act as resistance and the 50-day simple moving average (currently $36.92) to act as support for a risk/reward ratio which plays out to be -2.71% to 8.80%.
- On 27Feb14 the company reported fourth quarter earnings which beat on revenue. Revenue beat estimates by $20.66 million while earnings per share were in-line with estimates at $0.07 per share.
Health and wellness foods are in style these days and Sprouts is definitely one of the ways to play it in the stock market. Fundamentally, the company is expensively priced based on 2015 earnings and on future growth potential, but the earnings growth potentials in the near and long term are exceptionally high. Financially, I believe all the returns are safe and sound. On a technical basis I believe there is some downside to come. Due to the bearish technicals, expensive valuation based on earnings, and high valuation with respect to earnings growth I will not be pulling the trigger right now because I believe I can get it at a lower price.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: I am long SFM, SPY. 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.