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Wait for a Price Cut on Organic-Food Stocks

Sales growth in the organic-food space should prove to be sustainable over the long term, but the related stocks are currently overvalued.

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Ken Perkins: Organic and natural foods have gotten a lot of attention recently, and that's primarily because sales have grown by about 10% a year for the last decade. A lot of investors are skeptical about these trends and how sustainable they are, but we actually think that these growth rates can be sustained, primarily because consumers are more focused on health and wellness now than they have been in the past and many consumers are willing to pay premium prices for the perceived quality of these products.

Of course, affordability is an issue that organic food suppliers need to think about because some consumers may not be able to afford the premium prices that they have to pay in order to have access to these products. However, we think that there is still a lot of room for organic food to grow. There are many consumers who could afford it and haven't been buying it yet, and so we see a lot of room for growth on the demand side. On the supply side, we do think that there could be some limitations in terms of keeping up with the pace of the demand. However, with less than 1% of all U.S. farmland being allocated toward organic food products, we think that there shouldn't be any problem, at least over the near to medium term, with supply keeping up with the demand.

Ken Perkins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.