Should You Consider Investing in Sprouts Farmers Market (SFM)?

Silver Ring Value Partners, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. The partnership has compounded capital at an annualized rate of over 17% per year net of fees since inception. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Silver Ring Value Partners, in their Q1 2021 investor letter, mentioned Sprouts Farmers Market, Inc. (NASDAQ: SFM), and shared their insights on the company. Sprouts Farmers Market, Inc. is a Phoenix, Arizona-based supermarket company that currently has a $3.06 billion market capitalization. Since the beginning of the year, SFM delivered a 29.55% return, while its 12-month gains are up by 16.98%. As of May 03, 2021, the stock closed at $26.53 per share.

Here is what Silver Ring Value Partners has to say about Sprouts Farmers Market, Inc. in their Q1 2021 investor letter:

“Sprouts Farmers Market is a small format food market focused on produce and better-for-you products. The company is trading at approximately 55% of my Base Case Value, has a safe balance sheet and a competent management team.

In the middle of 2019 Jack Sinclair took over as CEO. The company, which IPO-ed as a high-growth retailer, had hit a rough patch. Comps decelerated to almost zero. Gross margins were under pressure as the company attempted to drive traffic with its promotional hi-low pricing strategy. The stock was down by more than 50% from its post-IPO high of 5 years prior.

Jack came from a great background for the job. He was the EVP of U.S. Groceries at Walmart and more recently the CEO of 99 Cents Only, a dollar-store concept. So he came in to the job familiar both with the U.S. grocery market and with operating a small-box retailer. Under Jack’s leadership, the company dug deep to better understand its target consumer. The results of the research was a shift away from overly promotional pricing that was appealing to a very small group of not very profitable customers. Combining the improved Gross Margins with a lowered cost to build a store due to eliminating unprofitable frills, the company was able to achieve very attractive, ~ 40%, 4-wall cash-on-cash return by year 4.

The plan is to restore same-store sales growth to low single-digits, and to continue to grow units by 10%+ per year with flat to expanding operating margins. If the company achieves this, it will rightfully deserve the label of “compounder.” If it fails, I think the risk is low. We are buying the shares at a low-teens P/E multiple on earnings normalized down for the positive impact of COVID. The embedded expectations are essentially for no store growth with a low single digit comp. As long as the business doesn’t completely fall apart, which it has shown no indication of, the risk/reward is quite asymmetric in our favor, which is how I like it.”

Our calculations show that Sprouts Farmers Market, Inc. (NASDAQ: SFM) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Sprouts Farmers Market, Inc. was in 25 hedge fund portfolios, compared to 27 funds in the third quarter. SFM delivered a 20.50% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.