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NGVC Poised to Stage a Turnaround?

Friday’s stock session saw solid gains across the board on news that China cut a key interest rate for the first time in two years.

But not all the action on Friday was based on lower Chinese rates…

Shares of Natural Grocers by Vitamin Cottage, Inc. (NGVC) soared by 19.6%, or $3.80 per share.

NGVC closed the day at $23.15 with more than 590,000 shares changing hands. This compares to the company’s average trading volume of 112,000 shares.

The spike was good news to investors who have witnessed a per-share price decline of 54.4% before Friday’s move.

Shareholders Getting Crushed: NGVC Year-to-Date Performance

Still, there are two reasons why I believe investors should take a closer look at this Lakewood, Colorado-based operator of 84 natural and organic grocery stores in 14 states.

Strong Financials Go a Long Way

On Thursday, Natural Grocers by Vitamin Cottage released its fourth-quarter results, which showed a profit of $3.2 million for the quarter – a 43.1% improvement over Q4 2013 results.

This represents a per-share profit of $0.14, which topped analysts’ expectations of a $0.13-per-share increase.

Fourth-quarter net sales were $135.7 million, an increase of $20.5 million over the fourth-quarter results for 2013 – a 17.8% improvement.

For the year, net sales increased to $520.7 million, an increase of 20.9% over the $430.7 million reported for FY 2013.

While new store sales amounted to $16.3 million, comparable same store sales saw increases, too, rising $4.3 million, or 3.7%.

This means same store sales showed an annualized increase of 5.6% for FY 2014, driven by a 1.4% increase in daily average transaction count and a 2.3% increase in transaction size.

Gross profits for the company increased 15.7% in Q4 2014, all the while the company’s gross margin decreased slightly from 29.1% to 28.6% due to higher leasing costs at newer stores.

However, the company’s gross margin is still 24.3% better than its sector average.

Finally, net income for the company increased 27.7% to $13.5 million with diluted earnings per share of $0.60 in FY 2014.

Short Squeeze Imminent?

Natural Grocers is one of the most shorted stocks on the Russell 3000.

According to Nasdaq, the company has a short interest of 2,200,675 shares against an average share volume of 84,475, which translates to 25.1 days to cover. That is, the total number of trading days it would take to close out open short positions if every share being traded represented only short positions.

You see, when shorts cover, there’s an increase in buying activity. This increased activity has the effect of pushing share prices higher until the price reaches equilibrium – where enough sellers come forward to close all open short positions.

This means a short squeeze could push share prices significantly higher in the near term.

But wait, it gets better…

NGVC has the added advantage of insiders taking positions on the other side of the trade, too.

In May, insiders purchased some 42,500 shares of NGVC, while July saw an exercise of another 944 options. Of course, insiders do this when they expect share prices to increase.

And the transactions make sense, considering that the stock is much closer to its 52-week low of $15.89 than to its 52-week high of $44.60 (reached on March 21, 2014).

So in this case, investors can benefit from higher stock prices on two fronts.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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