Natural Products in Public Markets

Examining how natural product companies faired financially in 2004.

ByAdam Ismail

With 2004 behind us, it is a good time to look at how the natural products industry faired in the public markets. A few interesting things surfaced during this analysis. For one, it is interesting to see how much this industry has consolidated. When I first started tracking an index of the industry in 1999 there were 128 companies traded in the public markets. Now, only 37 of those companies remain. Most of the companies have been acquired or have merged, but many of the smaller firms have “gone bust” or changed their focus.

Methodology

The index I have compiled combines the market capitalizations of 35 companies that operate in the natural personal care, dietary supplement, and natural, organic, and functional food spaces. It also contains representatives from most portions of the value chain. They are then weighted for the size of their market capitalization and compiled into the index. This method allows tracking of the total valuation of the publicly traded stocks and doesn’t allow the major price movements of some of the smaller liquid stocks to have a major impact on the index (See Figure 1).

2004 Performance

Overall the industry fared well in 2004, with the index growing nearly 20% from 14,082.67 to 16,884.05. This beats both the S&P 500’s and Dow Jones Industrial Average’s performances of almost 9% and 3.6% growth, respectively. However, there is a­nother component of return that should be explored—risk.

We cannot necessarily pat ourselves on the back for beating the market without looking at how much risk we took to get that return. After all, if you were really unconcerned about risk, you would fill your whole portfolio with highly volatile penny stocks that move 30% or more each day. As it turns out, the industry index was exactly three times more volatile than the Dow Jones Industrial Average! That means if we were fully invested in our industry we would have taken three times the risk for 5.5 times the reward, which is actually not bad!

Notable Performers

In 2004, the best performing stock in the index was Hansen Natural Corporation (NASDAQ:HANS), which recorded an impressive 340% gain. The fortunes for Hansen have turned around from its poor initial entry into functional carbonated beverages a couple years ago. As this issue went to press, the company had not yet turned in its full-year earnings re­sults, but after nine months it had grown its sales by 55% and its earnings by more than 250%. The company has managed to capture significant growth in the energy beverage market, which helped drive its 2004 performance. This is a sector that has seen its fair share of startup companies come and go, but Hansen seems to have developed something more sustainable and its shareholders are being rewarded for those efforts.

The worst performing company in the index was Pure World, Inc. (NASDAQ:PURW), which fell 38% in 2004. The company struggled last year, especially with the passing of its co-founder and famed corporate raider Natalie Koether. A majority of its sales have come from a few key accounts—something for which the markets will always punish a company due to the inherent risks in­volved. Pure World has also struggled in a sector where margins have continually declined to the point where even though it doubled its revenues in the third quarter, it still reported a greater loss. Hopefully its fortunes will turn around in 2005, but it is already off to a rocky start with the resignation of its CFO, who recently left the company for personal reasons.NW