What Drives The Value Of Our Stocks?

It depends on who you ask.

By Adam Ismail

There has been a lot of talk about the Internet bubble bursting in the public markets, but true nutrition industry diehards already know what that is like. As our industry is no longer growing at 20%+ rates, we decided to try to figure out why there is still so much volatility in our public valuations.

The classic economic life cycle tells us that what is supposed to follow rapid growth is a period of mature growth. So are we there? IRI and SPINS data suggest we are; herbals have been fluctuating between 0-6% growth and supplements as a whole are up 8-12%. In­tuitively it follows that when the market “corrected” itself in late 1998, valuations fell to the correct level. Growth rates really have not changed too dramatically since then, so why are our valuations oc­casionally as volatile as some biotech stocks?

The stock chart below came from NPICenter.com and is a composite index of supplement and botanical stocks. Despite our “mature” growth rates, look at the volatility. If you bought in during October and sold at its high in March, you would have had a 67% swing in the value of your investment. Of course not everybody will buy at the low and sell at the high, but pick any three months on the chart and you will not a find a period where the value did not swing more then 10% during the period. Keep in mind that this is an index, not an individual stock.

However, let’s look at the stocks that make up the index. There are 34, which is enough to have statistical significance. We copied this chart on June 9, 2000. Nothing major happened that day and the markets as a whole were not particularly volatile. The Dow was down slightly while the Nasdaq was up a little, but 35% of the stocks in this sector had price movements greater than 5%. An isolated two or three stocks might be normal, but on a random day finding 12 out of 34 with that much volatility says something is different.

This type of volatility indicates we are not in a period of mature growth, or at least investors don’t feel so. Do investors know more than statisticians? Perhaps. Remember stock valuations are driven by expectations of future growth. In speaking with a number of executives at the recent Newport Summit, a CEO retreat Health Business Partners hosts every year, we learned not one ex­pected less than 15% growth in sales this year and most said they would hit the 30% mark. You may have to discount things people say off the cuff, but that certainly is not mature industry growth.

One of the things we have seen is a shift in leaders from the entrepreneur mindset to one of growth minded leadership. Whereas before industry growth was driven by a particular supplement, and not by leadership and acumen, now business leaders are being forced to in­novate their strategies and marketing ef­forts. What we are seeing is a smarter supplement industry. Many companies are just now re­alizing the value of al­liances and ac­cretive acquisitions, as well as non-commodity product launches and sci­entific backing to their pro­ducts. All of these combine to create what we hope is a bright aggressive future for the sector. With any luck what we have been experiencing has just been a blip.

NW

Adam Ismail is a financial analyst with Health Business Partners (HBP),Warwick, RI) a boutique investment bank that works exclusively with companies in the natural products and complementary health services industries. HBP also provides capital to businesses in these industries as well as tracking financial data in the natural products industry and providing M&A and strategic advice, in addition to direct investments. HBP can be reached at 5784 Post Road, Warwick, RI 02818; 401-885-4670, Fax: 401-885-4686; E-mail: [email protected]; Website: www.healthbusiness.com.