How To Invest In The Herbal-Remedy Boom

By Daniel Kadlec

A disgusting diet of microbrews, cigars and fancy bagels, served up by Wall Street in recent years, has left fad-loving investors dizzy, nauseated and burned. Predictably, financial chefs are pushing a new dish: health food. At first blush, the "natural products" industry looks like just another of the stock market's fleeting love interests. The group tumbled hard this summer, led by a 78% drop in the shares of pill peddler General Nutrition. It was eerily reminiscent of the 75% crash at Boston Beer (brewer of Sam Adams) in 1996 and the 84% plunge that started at Consolidated Cigar about a year ago. Neither has recovered.

But I'm betting it will be different for companies that sell tablets and foods laced with the likes of St. John's wort and ginseng. For one thing, this is health food, not antihealth food. Since 1990 sales of natural foods and beverages and dietary supplements have grown 20% a year. This year consumers will shell out more than $18 billion for the stuff. Annual growth could slow to 15% or so as big retailers like Wal-Mart introduce private-label brands and force prices down. But that's still solid growth for a consumable product. One sign of Wall Street's interest is a big conference of professional investors and nutritional-supplement companies scheduled for this week in New York City.

How can you invest in this growth industry? The conservative plays are through big retailers and drug companies. Wal-Mart and Walgreens, for example, sell a lot of natural products. Among drug companies, American Home Products, Warner Lambert and Bayer AG have been aggressive. But the overall sales of these large companies overwhelm those of their natural products, so the impact is minimal. Take Wal-Mart: it sold about $500 million of natural products last year, but that pales next to total sales of $105 billion.

There are no mutual funds directed at this industry. To get a real piece of the action, you will have to delve into some relatively small individual stocks. About two dozen trade publicly. I suggest at least one from each of three categories. That provides some modest diversification. You will also have a better chance of seeing a big drug or supermarket firm buy out your company at a premium. Here are the companies that Wall Street analysts are most bullish on:

--Retailers. Whole Foods Market, General Nutrition and Wild Oats Markets. General Nutrition may be the pick. It's among the biggest, with $1 billion in annual revenue. With a price-earnings ratio of just 10, it trades at a discount to both its growth rate (20%) and the average P/E of other stocks of similar size (22).

--Vitamins and supplements. Rexall Sundown, Natrol and NBTY. Natrol is small, with less than $100 million in annual revenue but a growth rate of more than 50%.

--Natural foods. United Natural Foods, Twinlab, Horizon Organic and Celestial Seasonings. Twinlab is another 50% grower and has a P/E of just 14. Celestial Seasonings is doing well with herbal teas and other products, and it held up well when the nutritional-supplement group stumbled.

--By Daniel Kadlec