How to be profitable: Make stuff that people want

November 20, 2012
November 20, 2012

Hedge funds have been beefing up their holdings of tea maker Hain Celestial, according to a recent report on favorite stocks of hedge fund managers, from FactSet.

Within small-cap stocks, the funds’ grew their exposure to Hain Celestial Group Inc. (to +4.8 percentage points versus the S&P 600 from +3.3 in Q2), a natural and organic beverage, snack food, and personal care company. Hain Celestial has had a return of 69.0% over one year; a period during which the S&P 600 returned 9.7%.

That’s a heck of a run for the company, a smallish firm in Melville, New York. Hain Celestial is perhaps best known for its Celestial Seasonings line of teas, but it also sells a range of other healthy, organic-style products aimed at affluent, health-conscious customers.  (Whole Foods, a high-end food retailer, has been one of its largest customers.)

Where are we going with this? Well, the surge in Hain Celestial’s shares dovetails nicely with our previous screed on Twinkie-maker Hostess, which continues to wrangle with unions in bankruptcy proceedings. Whereas Hostess’ line of products has been increasingly viewed as “cheap, unhealthy and outmoded,” Hain Celestial’s focus on healthfully-marketed snacks such as its Terra Chips has enabled it to pass along price increases to well-heeled consumers. And that’s kept its profit margins in pretty good shape.

Meanwhile, Hostess—which has only emerged from its last bankruptcy in 2009 before re-entering in January 2012—is now battling in the courts over a plan to pay bonuses to management who are shutting the lights off at the company. A classy touch, given that the liquidation of Hostess may cost some 18,500 workers their jobs.

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