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Bull of the Day: Sprouts Farmers Market (SFM)

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Sprouts Farmers Market, a Zacks Rank #1 (Strong Buy), provides natural and organic food products primarily in the United States. Shares of the healthy grocer are widely outperforming the market this year with the backing of a leading industry group. The stock is hitting a series of 52-week highs and displaying relative strength as buying pressure accumulates in this top-ranked stock.

SFM stock is part of the Zacks Foods – Natural Foods Products industry group, which currently ranks in the top 29% out of more than 250 Zacks Ranked Industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months, just as it has consistently over the past year:

Zacks Investment Research
Image Source: Zacks Investment Research

This industry is also showing favorable characteristics as we can see below:

Zacks Investment Research
Image Source: Zacks Investment Research

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.

Company Description

Sprouts Farmers Market (SFM - Free Report) boasts a unique grocery model, offering a variety of fresh produce, meats, seafood, dairy, vitamins, and other supplements. Founded in 1943, the Phoenix-based grocer operates more than 400 stores in 23 states.

The company’s focus on product innovation and expansion of private label offerings bodes well for the future. The organic foods provider has witnessed a remarkable surge in e-commerce sales this year, expanding its digital footprint through key partnerships with Uber Eats, DoorDash, and Instacart.

An aggressive expansion plan to open 35 new stores in 2024 underscores its confidence in long-term growth. Sprouts has invested heavily to improve operational efficiencies, highlighted by its Fresh Item Management Technology which deploys computer-assisted ordering methods.

Earnings Trends and Future Estimates

The top-ranked company has put together an impressive earnings history, surpassing earnings estimates in each of the past twenty consecutive quarters. Back in July, Sprouts reported second-quarter earnings of $0.94/share, a 22.1% surprise over the $0.77/share consensus estimate.

The grocer has delivered a trailing four-quarter average earnings surprise of nearly 12%. Consistently beating earnings estimates is a recipe for success and bolsters the bullish case.

SFM shares received a boost as analysts covering the company have been increasing their third-quarter earnings estimates lately. For the current quarter, earnings estimates have risen 8.7% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $0.75/share, reflecting a potential growth rate of 15.4% relative to the year-ago period.

Zacks Investment Research
Image Source: Zacks Investment Research

Let’s Get Technical

SFM stock has advanced more than 100% this year alone. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.

Only stocks that are in extremely powerful uptrends are able to witness this type of price move. SFM shares broke out to a series of all-time highs back in August, even as the general market pulled back. Stocks that hold up well through periods of volatility tend to lead the next leg higher.

StockCharts
Image Source: StockCharts

Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping up. The stock has been widely outperforming the major indices, indicating a prolonged period of relative strength. With both strong fundamental and technical indicators, SFM stock is poised to continue its outperformance.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Sprouts Farmers Market has recently witnessed positive revisions. As long as this trend remains intact (and SFM continues to deliver earnings beats), the stock will likely continue its bullish run into the end of this year and beyond.

Bottom Line

A promising combination of accelerating growth and momentum metrics bodes well for SFM shareholders, as the trend appears set to continue in the quarters ahead.

Backed by a top industry group and impressive history of earnings beats, it’s not difficult to see why this company is a compelling investment. Robust fundamentals combined with an appealing technical outlook certainly justify adding shares to the mix. The future looks bright for this highly-ranked, leading stock.


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