The Conservative Investor Digest

I am excited about this month’s profiled company. It is a small health grocer on the West Coast that makes over $100+ million per year in annual profits, and has an outstanding management team that has grown the business from one health food store making a few hundred thousand dollars in 2002 into a 191 store firm is starting to exhibit bargaining power over its inventory while still being small enough to fit into the “get ‘em while they are small” classification of investing.

It’s not the kind of stock that has gotten much attention yet, as it is too small to have dedicated Wall Street analysts covering it specifically. It also doesn’t show up in stock screeners, as it has been a poor performing stock since its 2013 IPO. But here is why that spells opportunity: the stock has almost doubled earnings between 2013 and 2015, but the poor performance is solely the result of a collapsing P/E ratio. The grocer traded at over 100x earnings, and it has come down significantly since then.

Meanwhile, management is explicitly dedicated to increasing the store count annually by 14% per year for the next five years, and existing stores have delivered 10% same-store sales growth over the past two years. In short, you have this opportunity to make a lot of money because the new stores are being funded by existing earnings rather than share dilution. And then you have new store expansion joining forces with strong same-store sales growth to provide two strong drivers of future shareholder returns.

The opportunity is that the valuation is fair, the growth is self-funded, and earnings are growing at 21.9% compounded. All the valuation from the IPO has been burned off, and the stock is now at a point where earnings per share growth will directly translate into capital appreciation. The stock also earns 15.5% returns on equity.

And my favorite part? The company has seen same-store sales improvements for 35 quarters straight. Even during the worst of The Great Recession, same-store sales grew in the mid single digits. It is unusual to find a company that has double-digit same store sales growth in good economic times, mid single digit growth in rough economies, and is committed to funding store count increases of 14% for the next five years. Accepting that nothing is certain in the world, there are all strong indicators of significant market outperformance over the medium term.

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