Stocks to Buy Now: How to Find the Next Whole Foods

With conservative, low-beta sectors such as consumer staples driving the market higher in the first quarter, it is not surprising that select food stocks are getting in on the act, being among favorite stocks to buy in Q1.

Prized for their consistent, predictable earnings and in many cases, steadily rising dividends, food stocks usually viewed as boring by investors were first-quarter leaders.

For example, General Mills Inc. (NYSE: GIS) surged 19.3% in the first quarter. The maker of Cheerios, and other highly recognizable brands announced a 15% dividend increase in March. Rivals ConAgra Foods Inc. (NYSE: CAG) and Kraft Foods Group Inc. (Nasdaq: KRFT) are up 19% and 12.6%, respectively.

But investors who want the reliability of food stocks but are in search of more growth should look past these big-name favorites.

There is another group of stocks delivering huge gains in the industry, and that's health food stocks.

Stocks to Buy Now: Profit from the Health Food Craze

Sales growth of organic and non-organic health foods eclipsed $30 billion and outpaced sales growth for traditional food makers for the first time in 2011.

And there's still plenty of room for growth.

Market researcherPackaged Factsnow projects that U.S.retail sales of natural and organic foodsand beverages should exceed $78 billion by 2015 - up from $39 billion in 2010.

At this point, it is fair to say many investors know a little something about either Whole Foods Market Inc. (Nasdaq: WFM) or maybe even The Hain Celestial Group Inc. (Nasdaq: HAIN). The two are arguably the Apple and Google of health food stocks growth stories.

In the past five years, shares of Hain Celestial have more than doubled. Granted this is a long time to have held a stock, but Whole Foods shares have jumped nearly 2,900% since the company went public in 1992.

Again, Hain Celestial and Whole Foods are the known entities in the health foods arena. Dozens of analysts cover the companies and each has ample institutional ownership.

While that does not mean these two stocks offer no more upside, investors might want to consider other health foods names as a way of profiting from the healthy eating craze.

Let's take a look at the other options.

Stocks to Buy to Profit from the Whole Foods Movement

One Whole Foods alternative to consider is United Natural Foods Inc. (Nasdaq: UNFI).

The stock has a market cap just north of $2 billion, meaning it resides barely outside the official definition of small-cap territory. That also means United Foods is roughly 20% the size of Whole Foods.

Unfortunately, United Foods is wearing a near-term scarlet letter because the stock is down almost 10% year-to-date, a decline that is far worse than what has been seen with Whole Foods and one that is made all the worse by the fact that the broader market is higher.

What is important to note about United Natural is that it is a distributor of many of the products sold in Whole Foods. That means the companies are partners, not direct competitors. And United Natural is not confined to its relationship with Whole Foods. United Natural also distributes health foods to major national grocery store chains, which are making more room on their shelves for healthy products to meet increased demand from shoppers.

United Natural may have some more near-term downside to contend with by virtue of an uncertain economic environment, but savvy investors can use that opportunity to start new positions in the stock in preparation of a rebound.

Stocks to Buy: Pros and Cons of Lifeway Foods

Disclaimer alert: Those who are not fans of micro-cap stocks should stay away from Lifeway Foods Inc. (Nasdaq: LWAY), which has a market cap of less than $230 million.

The good news, however, is that this is a legitimate micro-cap, not some fly-by-night, pump-and-dump penny stock.

On April 1, the company reported a quarterly profit compared with a year-earlier loss. "Total net income was $5.6 million, or $0.34 per share, for the twelve-month period ended December 31, 2012 compared to $2.9 million, or $0.17 per share, in the same period in 2011," the company said in a statement.

For 2012, sales jumped 16%. In the fourth quarter, profits, sales and margins all surged, said the maker of the Lifeway Kefir line of cultured dairy products.

After soaring more than 59% to start 2013, the stock now trades at almost 40 times forward earnings. In other words, Lifeway is richly valued, and that is a risk.

On the other hand, the stock has decent institutional support, but there is room for more, implying there could be some upside left as late-comer money managers take note of Lifeway.

Stocks to Buy: The Next Whole Foods

But there's another organic food company that Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks could double or even triple if just one-half what he sees ahead for this health-food industry pans out.

In fact, Keith believes so strongly in this trend that this recent IPO could easily become "The Next Whole Foods."

That's because as Whole Foods becomes referred to as "Whole Paychecks" among more and more shoppers, consumers will look elsewhere for cheaper organic products.

That's where this company has a competitive advantage with its much smaller stores. As a result, they are able to offer prices 8%-10% lower than Whole Foods.

What's more, the company offers entirely organic and natural products, whereas Whole Foods offers a combination of organic and non-organic products. Stores also provide their customers with science-based nutrition programs in order to help them make informed decisions.

But here's where the payoff really is for investors: the company used the $54 million it raised in its share offering to pay off debt and can now fund its expansion with a clean slate. Very few companies have this luxury.

So how fast can this company grow? Going forward the company plans to expand its store count by 20% a year. That's real tangible growth in a down economy.

And with just 60 stores currently in operation and the prospect of 1,000 stores in the future, that's practically like buying Whole Foods at the beginning of its run.

Since the company's stock began trading publicly in July 2012, shares have gained 34.39%. Says Keith: "I don't expect the price to stay so low for long."

To see Keith's full write-up, click here to subscribe to Money Map Report and check out the December issue.