Are Retail-Wholesale Stocks Lagging Sprouts Farmers Market (SFM) This Year?

Building a successful investment portfolio takes skill and hard work, no matter if you're a growth, value, income, or momentum-focused investor.

But how do you find the right combination of stocks? Funding your retirement, your kids' college tuition, or your short- and long-term savings goals certainly requires significant returns.

Enter the Zacks Rank.

What is the Zacks Rank?

The Zacks Rank, which is a unique, proprietary stock-rating model, employs earnings estimate revisions, or changes to a company's earnings expectations, that makes building a winning portfolio easier.

There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise.

Agreement is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of analysts revising their estimates higher, the better chance the stock will outperform.

Magnitude is the size of the recent change in the consensus estimate for the current and next fiscal years.

Upside is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.

Surprise is made up of a company's last few quarters' earnings per share surprises; companies with a positive earnings surprise are more likely to beat expectations in the future.

Each factor is given a raw score, which is recalculated every night and compiled into the Zacks Rank. Utilizing this data, stocks are put into five different groups: Strong Buy, Buy, Hold, Sell, and Strong Sell.

The Power of Institutional Investors

The Zacks Rank also allows individual investors, or retail investors, to benefit from the power of institutional investors.

Institutional investors are responsible for managing the trillions of dollars invested in mutual funds, hedge funds, and investment banks. Research has shown that these investors can and do move the market due to the large amount of money they deal with, and thus, the market tends to move in the same direction as them.

These investors are known for designing valuation models that focus on earnings and earnings expectations in order to figure out the fair value of a company and its shares. If earnings estimates are raised, it puts a higher value on a company.

Institutional investors will use these changes to help in their decision-making, typically buying stocks with rising estimates and selling those with falling estimates. Higher earnings expectations can translate into a rise in stock price and bigger gains for the investor.

Retail investors who get in at the first sign of upward revisions have a distinct advantage over larger investors since it can often take weeks, if not months, for an institutional investor to build a position. They'll also benefit from the expected institutional buying that could follow.

Not only can the Zacks Rank help you take advantage of trends in earnings estimate revisions, but it can also provide a way to get into stocks that are highly sought after by professionals.

How to Invest with the Zacks Rank

The Zacks Rank is known for transforming investment portfolios. In fact, a portfolio of Zacks Rank #1 (Strong Buy) stocks has beaten the market in 26 of the last 32 years, with an average annual return of +25.41%.

Moreover, stocks with a new #1 (Strong Buy) ranking have some of the biggest profit potential, while those that fell to a #4 (Sell) or #5 (Strong Sell) have some of the worst.

Let's take a look at

Sprouts Farmers (SFM)

, which was added to the Zacks Rank #1 list on November 1, 2024.

Sprouts Farmers Market, Inc., which operates in a highly fragmented grocery store industry, has a unique model that features fresh produce, foods section, and a vitamin department focused on overall wellness. Moreover, the company has been diversifying its offerings to meet changing preferences of consumers, who are looking for more health and wellness products. These products are generally plant-based, gluten-free, keto-friendly, and grass-fed. The company has been focusing on natural and organic food, which is one of the fastest growing segments in the industry.

Six analysts revised their earnings estimate higher in the last 60 days for fiscal 2024, while the Zacks Consensus Estimate has increased $0.27 to $3.64 per share. SFM also boasts an average earnings surprise of 15.3%.

Analysts are expecting earnings to grow 28.2% for the current fiscal year, with revenue forecasted to rise 11.8%.

SFM has been moving higher over the past four weeks as well, up 24.4% compared to the S&P 500's gain of 3.1%.

Bottom Line

With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Sprouts Farmers should be on investors' shortlist.

If you want even more information on the Zacks Ranks, or one of our many other investing strategies, check out the Zacks Education home page.

Discover Today's Top Stocks

Our private Zacks #1 Rank List, based on our quantitative Zacks Rank stock-rating system, has more than doubled the S&P 500 since 1988. Applying the Zacks Rank in your own trading can boost your investing returns on your very next trade. See Today's Zacks #1 Rank List >>

Zacks Investment Research

Return on equity (ROE) is one of the most favored metrics of investors. It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare this to historical or industry benchmarks to pick a winning stock.

However, stepping beyond the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis comes into play. It is an analytical method, which examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. Below we show how DuPont breaks down ROE into its different components:

ROE = Net Income/Equity

Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)

ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier

The screener yields winning stocks like Casey's General Stores CASY, EMCOR Group EME, EverQuote EVER and Sprouts Farmers Market SFM.

Why Use DuPont?

Although one can’t play down the importance of normal ROE calculation, the fact remains that it doesn’t always provide a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having higher margins from those having high turnover. For example, high-end fashion brands generally survive on high margin as compared with retail goods, which rely on higher turnover.

In fact, it also sheds light on the company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.

So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins over and spots the better stock.

Investors can simply do this analysis by taking a look at the company’s financials.However, looking at financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can come to your rescue and help you shortlist the stocks that look impressive with a DuPont analysis.

Screening Parameters

• Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.

• Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.

• Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.

• Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments.

• Current Price more than $5: This screens out the low priced stocks. However, when looking for lower priced stocks, this criterion can be removed.

Here are four out of six stocks that made it through the screen:

Casey's General Stores: The Zacks Rank #2 company operates convenience stores under the Casey's and Casey's General Store names in 16 states, mainly Iowa, Missouri and Illinois. You can see the complete list of today’s Zacks #1 Rank stocks here.

The average earnings surprise of CASY for the past four quarters is 15.83%.

EMCOR Group:The Zacks Rank #1 company is one of the leading providers of mechanical and electrical construction, industrial and energy infrastructure, as well as building services for a diverse range of businesses.

The average earnings surprise of EME for the past four quarters is 32.26%.

EverQuote: The Zacks Rank #2 company is an online insurance marketplace. Through its Internet websites, the company operates an online marketplace for consumers shopping for auto, home and renters and life insurance. EVER is presently reporting two main verticals — Auto and Home and Renters.

The average earnings surprise of EVER for the past four quarters is 149.58%.

Sprouts Farmers Market: The Zacks Rank #1 company operates in a highly fragmented grocery store industry, has a unique model that features fresh produce, foods section, and a vitamin department focused on overall wellness.

The average earnings surprise of SFM for the past four quarters is 15.29%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

Zacks Investment Research

Investors seek growth stocks to capitalize on above-average growth in financials that help these securities grab the market's attention and produce exceptional returns. But finding a great growth stock is not easy at all.

By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it could lead to significant loss.

However, the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects, makes it pretty easy to find cutting-edge growth stocks.

Sprouts Farmers (SFM) is one such stock that our proprietary system currently recommends. The company not only has a favorable Growth Score, but also carries a top Zacks Rank.

Research shows that stocks carrying the best growth features consistently beat the market. And returns are even better for stocks that possess the combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy).

While there are numerous reasons why the stock of this natural and organic food retailer is a great growth pick right now, we have highlighted three of the most important factors below:

Earnings Growth

Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Sprouts Farmers is 14.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 28% this year, crushing the industry average, which calls for EPS growth of 9.6%.

Cash Flow Growth

While cash is the lifeblood of any business, higher-than-average cash flow growth is more important and beneficial for growth-oriented companies than for mature companies. That's because, growth in cash flow enables these companies to expand their businesses without depending on expensive outside funds.

Right now, year-over-year cash flow growth for Sprouts Farmers is 10.4%, which is higher than many of its peers. In fact, the rate compares to the industry average of -2.2%.

While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 14.9% over the past 3-5 years versus the industry average of 6.8%.

Promising Earnings Estimate Revisions

Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

The current-year earnings estimates for Sprouts Farmers have been revising upward. The Zacks Consensus Estimate for the current year has surged 9.3% over the past month.

Bottom Line

Sprouts Farmers has not only earned a Growth Score of A based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #1 because of the positive earnings estimate revisions.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination indicates that Sprouts Farmers is a potential outperformer and a solid choice for growth investors.

Zacks Investment Research

Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.

We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.

Now that we know how important earnings and earnings surprises are, it's time to show investors how to take advantage of these events to boost their returns by utilizing the Zacks Earnings ESP filter.

The Zacks Earnings ESP, Explained

The Zacks Earnings ESP is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete information.

Now that we understand the basic idea, let's look at how the Expected Surprise Prediction works. The ESP is calculated by comparing the Most Accurate Estimate to the Zacks Consensus Estimate, with the percentage difference between the two giving us the Zacks ESP figure.

When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% annual returns on average, according to our 10 year backtest.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider Abercrombie & Fitch?

Now that we understand what the ESP is and how beneficial it can be, let's dive into a stock that currently fits the bill. Abercrombie & Fitch (ANF) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $2.43 a share, just 13 days from its upcoming earnings release on November 26, 2024.

ANF has an Earnings ESP figure of +4.59%, which, as explained above, is calculated by taking the percentage difference between the $2.43 Most Accurate Estimate and the Zacks Consensus Estimate of $2.32. Abercrombie & Fitch is one of a large database of stocks with positive ESPs. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.

ANF is one of just a large database of Retail and Wholesale stocks with positive ESPs. Another solid-looking stock is Sprouts Farmers (SFM).

Sprouts Farmers is a Zacks Rank #1 (Strong Buy) stock, and is getting ready to report earnings on February 27, 2025. SFM's Most Accurate Estimate sits at $0.71 a share 106 days from its next earnings release.

The Zacks Consensus Estimate for Sprouts Farmers is $0.69, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +3.39%.

ANF and SFM's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.

Find Stocks to Buy or Sell Before They're Reported

Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they're reported for profitable earnings season trading. Check it out here >>

Zacks Investment Research

How much a stock's price changes over time is a significant driver for most investors. Not only can price performance impact your portfolio, but it can help you compare investment results across sectors and industries as well.

The fear of missing out, or FOMO, also plays a factor in investing, especially with particular tech giants, as well as popular consumer-facing stocks.

What if you'd invested in Sprouts Farmers (SFM) ten years ago? It may not have been easy to hold on to SFM for all that time, but if you did, how much would your investment be worth today?

Sprouts Farmers' Business In-Depth

With that in mind, let's take a look at Sprouts Farmers' main business drivers.

Sprouts Farmers Market, Inc., which operates in a highly fragmented grocery store industry, has a unique model that features fresh produce, foods section, and a vitamin department focused on overall wellness. Moreover, the company has been diversifying its offerings to meet changing preferences of consumers, who are looking for more health and wellness products. These products are generally plant-based, gluten-free, keto-friendly, and grass-fed. The company has been focusing on natural and organic food, which is one of the fastest growing segments in the industry.

This Phoenix, AZ-based company is an everyday healthy grocery store. As of Sept. 29, 2024, the company operates about 428 stores in 23 states. The company classifies products into perishable and non-perishable categories. While perishable product categories (57.3% of 2023 sales mix) include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives; non-perishable product categories (42.7% of 2023 sales mix) include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.

KeHE Distributors is the company’s main supplier of dry grocery and frozen food products, and accounts for approximately 47% of total purchases in fiscal 2023. Another 3% of total purchases in fiscal 2023, were made through secondary supplier, United Natural Foods Inc. Primary supplier of meat and seafood accounted for approximately 14% of total purchases.

The company's stores are generally located in a variety of mid-sized and larger shopping centers, lifestyle centers and in certain cases, independent single-unit, stand-alone developments.

Bottom Line

Anyone can invest, but building a successful investment portfolio takes a combination of a few things: research, patience, and a little bit of risk. So, if you had invested in Sprouts Farmers a decade ago, you're probably feeling pretty good about your investment today.

According to our calculations, a $1000 investment made in November 2014 would be worth $4,856.05, or a gain of 385.61%, as of November 13, 2024, and this return excludes dividends but includes price increases.

Compare this to the S&P 500's rally of 193.58% and gold's return of 114.96% over the same time frame.

Analysts are anticipating more upside for SFM.

Shares of Sprouts Farmers have increased and outperformed the industry in the past three months. The company’s focus on product innovation, emphasis on e-commerce, expansion of private label offerings and targeted marketing with everyday great pricing bodes well. It has been lowering operational complexity, optimizing production, improving in-stock position and updating to smaller format stores. These efforts helped post better-than-expected third-quarter 2024 results, wherein both the top and the bottom lines grew year over year. Buoyed by the performance, the company provided a decent 2024 guidance. It now anticipates a 7% year-over-year increase in comparable store sales for the year, contributing to an expected net sales growth of 12%. However, operating margin remains an area to watch, with challenges expected in the SG&A domain. The stock is up 24.99% over the past four weeks, and no earnings estimate has gone lower in the past two months, compared to 6 higher, for fiscal 2024. The consensus estimate has moved up as well.

Zacks Investment Research

Sprouts Farmers Market, Inc. SFM reached a new 52-week high of $147.21 yesterday, a significant milestone that has caught investors’ attention. The company's ongoing strategic initiatives and favorable economic conditions set a positive tone for its performance, leaving investors pondering whether it's time to buy the stock, hold their positions or take profits.

Over the past month, Sprouts Farmers stock has risen 27.1% compared with the industry’s growth of 14.6%. It has outperformed the broader Retail and Wholesale sector and the S&P 500 index, which posted growth of 3.9% and 2.7%, respectively.