Clean Yield has long been hip to Hain, which went public in the 1990s. Hain is a leading producer of natural and organic foods and personal care products. Its brands include Earth’s Best Organic, Garden of Eatin’, Terra Chips, Imagine (soups), Dream (beverages), Alba Botanica, and Avalon Organics.
The company – and its stock price – grew rapidly from its early 1990s inception, as the stock rose from $2 per share in 1995 to $70 in 2015. Since 1995, the stock has returned 1,847% to investors, versus 505% for the S&P 500 Index.
Despite the company’s gargantuan growth, Clean Yield soured on the stock in 2015 for several reasons. First, the stock, we thought, had become too expensive relative to the company’s likely earnings growth. Second, Hain relied heavily on acquiring other companies to sustain its own growth, which we thought was unsustainable. Third, we had questions about the integrity of the company’s financial statements. After a long, gluttonous run with Hain, we shifted away from the stock (subject to tax constraints).
Recently, our appetite for Hain returned. Clean Yield prefers stocks that are out of favor or unknown, which we think can be great bargains. Since Hain’s stock peaked at $70 in 2015, it has fallen to a recent price of $27, which has caused us to take another look. The company’s poor recent results have diminished investor interest, but we see several positive changes developing.
First, last summer an activist investor (Engaged Capital) bought 10% of Hain’s stock and succeeded in adding six new board members. Engaged has an investment horizon of two to five years, either to turn around a company’s operations or to sell the company for a higher price. We think either outcome will satiate investors. Second, Hain has a new strategic plan to improve results and increase the stock price. Project Terra is Hain’s program to streamline the company and reduce costs, with savings to be reinvested in the company’s top brands. Third, the company plans to sell its organic meat business, Hain Pure Protein, which accounted for almost 20% of Hain’s total sales last year. Proceeds will be used to reduce debt and repurchase stock on the open market at depressed levels.
There are also indications that Hain is taking steps to strengthen its sustainability programs. The company has undergone a process to identify its key sustainability issues, which include traceability (of ingredients), food safety and quality, fair wages and working conditions, and climate change. It plans to issue an updated sustainability report later in 2018 and has also undertaken a comprehensive assessment of its water risk exposure and impact. It has committed to lead on issues related to GMO labeling, sodium and sugar consumption, and animal welfare. While we have yet to see much data to back up these commitments, we’re encouraged that sustainability seems to be a key part of Hain’s turnaround story.
After a long hiatus, we once again like Hain’s financial and social return prospects. In an overall stock market that is one of the most expensive in the past hundred years, we like this contrarian pick.