SFM looks undervalued and oversold: fair value is about $102 at a 9% required return, or around $118 under CAPM; it still screens undervalued at 12%, but at 13% he would wait for a lower price. Its P/E is in the green zone. He is likely to buy for the long term and hopes for a slight decline.

In this video, we take a look at "Sprouts Farmers Market", whose trading symbol is SFM. "Sprouts Farmers Market" is a retail company that sells agricultural products. They sell and have smaller stores.

It is similar to Whole Foods or Trader Joe's, the kind of stores that target the middle class, and is slightly less expensive than companies like Whole Foods, especially in agricultural products.

They have amazing prices for agricultural products. However, they do not have that much diversity. They tend to work in smaller stores, and they have done a good job of expanding.

But interestingly, when we look at their price chart over the past year, we see that their shares have fallen significantly.

For me personally, what I like to do when analyzing a company is try to understand what drives the company and what drives the stock . For example, when looking at this chart, we can clearly see that there is a significant decrease here.

Fortunately, on the "Investors Group" website, we have this feature that allows you to browse the news specific to that day . What happened that day that caused this drop? That may give us some insights, but I find it better in this particular case to look at a long-term plan.

This long-term chart covers 3 years, and we see that the stock rose significantly and then fell by a huge amount during the last year. It has been almost a year and a half since the real decline began.

Initially, as these stocks began to rise, the most important factor that helped them in the early stages was that they began to improve their profit margins. We'll take a look at these numbers in a minute.

However, the gross profit margin began to improve more and more. Then sales at existing stores also began to improve .

They often call this "comparisons". Well, comparisons for Sprouts Farmers Market are starting to improve. Initially, they were growing at a mid-single-digit rate , with the number of products and sales volume in any given store improving on average .

This is a great sign for a retail company, and a very important number for us to monitor.

Thus, sales at existing stores jumped from about 4% to nearly 6.5 %. We now have better-than-expected existing store sales, improving profit margins, and increasing earnings per share .

So, the stock actually started to gain momentum.

When the July earnings were announced, the stock jumped by about 13%. Okay, let's move on a bit to the next earnings report , where existing store sales exceeded 8%. Since it exceeded 8%, the stock jumped by about 8%.

So, once again, the stock rises as the company's pace accelerates, profit margins improve , store sales improve , and revenue grows. Overall, this company performs very well in terms of overall figures.

The stock started to decline, then came the actual announcement of the suspension of tariffs, which helps American retailers, because, as you know, tariffs are bad for them. The tariffs were suspended , and the stock began to rise again.

But then everything started to fall apart. Thus, the stock fell by about 26% after the announcement of their earnings. When they announced their earnings, sales at existing stores had already increased by a good number, but they were not up to expectations.

This happened even though earnings per share exceeded analysts' estimates, but we began to see a decline in sales figures for existing stores. At one point, they were expecting sales growth at existing stores to exceed 10%, but things started going in the opposite direction.

It is clear that Wall Street is always looking ahead. They did not like this, and they sold the stock heavily. Let's move forward a bit; they got stuck at that point on what was happening in the market.

There were some increases in customs duties, especially with some of their suppliers, which made things go a little further . Thus, the stock became a victim of the broader market.

Then the Centers for Disease Control and Prevention (CDC) issued a statement about agricultural products causing some problems. You may recall seeing some of that in the news, and of course, being a company that relies heavily on agricultural products, it was hurt by it.

The first conclusion here is that all of this was based on expectations. Expectations during the rise were that this company would grow extremely fast, and when that excitement faded, they sold it aggressively.

So, the real question is: Did they oversell it? Is it a good company to invest in right now? For that reason , let's move on to take a look at some numbers. First, we have a revenue graph, and we can see that the revenue has performed fairly well .

It has been strong growth, and I would call it respectable growth.

When we turn to look at the profit margins, we find that the profit margins actually performed well. So this is the net profit margin, i.e., for every $100 of revenue, how much does the company keep for itself after deducting all expenses and everything else?

Well, here you can see that they keep a little over $5 for every $100 of revenue.

We can see a very similar story when we move on to look at earnings per share. This will be useful when we look at the price-to-earnings ratio in a bit, but we can see that, well, it's okay.

In the most recent figure for the past 12 months, it declined slightly, but overall, earnings per share have been performing well on the upswing.

Okay, now let's move on to take a look at free cash flow . Regarding free cash flow, we have two different sets of data here. The dark blue bars are the analysts' actual figures, and the green bars are the analysts' estimates.

So we can see that the free cash flow was not completely stable. I mean, 2020 had a slight impact on the numbers, but overall it increased by a good percentage, with a really big jump recently, and analysts expect it to continue rising.

Now we can use these free cash flow estimates to try to arrive at a fair value for Sprouts Farmers Market stock to see if investing in it today is worthwhile.

So, when we turn to the discounted cash flow calculator on the "Investors Grow" website, we find that it actually appears to be less than its true value. In fact, the fair value, and this using a required rate of return of 9%, we find that we get a fair value of about $102 per share.

Now, if we use the Capital Asset Pricing Model (CAPM) for short, you can see that the fair value would be around $118 per share. Now, let's assume you have a much higher required rate of return .

It might be 12% or so. Well, this is the expected return here, you can see it's a little over 12% currently. So, if your desired rate of return is 10% or 11%, this stock will still appear undervalued.

If it is 12%, it still seems to be undervalued. If it's 13%, well, that's okay. Wait until the stock price drops for a little longer .

Now, I often like to confirm this valuation method, which clearly indicates that "Sproots Farmers Market" appears to be undervalued.

Okay, let's compare that to something like price-to-earnings multiples. So, here's how to read this graph. If I buy a stock while it is in the green zone, is it valued at more or less than its true value?

Well, we can look at these numbers here, and basically we can see that if we had bought it when it was in the green zone, we would have made a profit of approximately 32% . If we buy it while it is in the red zone, it will be valued at more than its worth and you will have lost money, i.e., about 16%.

So, it turns out that Sprouts Farmers Market's price-to-earnings ratio was a fairly good indicator of whether a purchase was appropriate or not. Currently, the stock is in the green zone.

So, is it in the green zone according to the discounted cash flow model? After researching this company, I became a big fan of it . I think they are directly competing with companies like Trader Joe's, and I see an opportunity for them to continue expanding their business, opening new stores, and continuing to grow.

I think their stock was overpriced for a while when people started to value the company as a fast-growing company. I think this is the wrong way to look at this company. I think the market has oversold it right now, and to me, it looks like an interesting buy.

Therefore, I am likely to buy shares in this company for my long-term investment portfolio. I hope the stock will decline slightly. As always, when I say I like a company, I usually prefer to post the video and give everyone enough time to do their own research.

So, I might wait until next week to enter and buy this stock. I hope the stock drops a little more so I can get it at a better deal.

But there is enough margin of safety here that makes me think this company could perform well in the long run. I think the market overvalued it and raised its price too high, and now I see that it has declined excessively.

I believe this is an opportunity for the long-term investor.