I bought Sprouts Farmers Market (SFM). I had looked at it once before, in late 2024. I found the business model and strategy compelling. What put me off was the valuation. In part, it was justified: years of strong earnings growth and, above all, profitability well above the industry average. Still, SFM stock was too expensive for me and dropped off my radar.

I admit that AI bear Michael Burry was the trigger, but not the reason, for my purchase. The "Big Short" investor recently increased his bets against NVIDIA and other tech stocks and built his long position in SFM to full size. His stated reason: "rather attractive." I agree. The stock looks very cheap. Its price-to-cash-flow ratio (P/CF) is below 9 based on expected 2026 cash flow, and just 8 and 6.5 based on forecasts for the next two years. I still find the business model promising. I couldn't resist.

Sprouts Farmers Market sounds like a farmers market, and that's exactly the idea. Shoppers are meant to feel like they're at a weekly market, not a discounter. It works. Since its founding in 2002, the chain has grown from one store to 490 across 25 US states. The assortment is built around the health trend: fresh food and organic, plant-based, gluten-free own-brand products take center stage. That puts Sprouts between conventional supermarkets like Walmart and Costco Wholesale and organic specialists like Whole Foods.

Sprouts wants to grow mainly through new stores. Around 10% new locations are planned every year, and the company sees potential for over 1,000 stores. So there's plenty of room to keep the recent growth trend going. From 2015 to 2025, revenue grew 9.4% a year on average, and adjusted earnings per share by 20% a year. Sprouts isn't just getting bigger, it's getting more profitable. Its ten-year average gross margin is 32.9% and its net margin 3.9%, ahead of Walmart (24.9% and 2.5%) and Costco (12.9% and 2.4%).

The road ahead speaks for the company, too. Average market expectations for 2026 to 2028 call for operating cash flow growth of around 11.8% a year. These forecasts are ambitious but not overreaching, since growth over the past 10 years was right in that range. That fits the current valuation.

Besides new stores, growth could come from the private label and the loyalty program launched nationwide in 2025. Launch costs may weigh on earnings in the short term, but longer term, the program promises more stable, more predictable revenue.

I see risk in slowing growth at existing stores. Since summer 2025, momentum in comparable sales has faded, and in the first and second quarters of 2026 they even dipped slightly. A large part of that weakness came from positive one-offs in the comparison periods, such as sharply higher egg prices and a strike at a competitor.

The fundamental risks include tough competition in grocery retail. Sourcing is concentrated, too: wholesaler KeHE covers around half of Sprouts' merchandise purchases. Industry-wide, the spread of weight-loss drugs such as GLP-1 medications adds uncertainty.

After weighing opportunities and risks, I see an attractive entry point now, after the overvaluation of a few years ago and the price collapse from the all-time high of $182. The stock may also have found a floor on the chart. But over the past few months, it has struggled to build lasting upward momentum. The slide from the record high has left its mark. Further losses can't be ruled out. That's why I've only bought a small position for now.

Is Sprouts Farmers Market (SFM) a buy? At current levels, I consider Sprouts Farmers Market a buy, but only as a small starting position. The stock trades at a price-to-cash-flow ratio below 9 on expected 2026 cash flow, falling to 6.5 on 2028 forecasts, while market expectations call for operating cash flow growth of around 11.8% a year through 2028. The biggest risk is slowing growth at existing stores: comparable sales dipped slightly in the first and second quarters of 2026.

Disclaimer: This newsletter is for informational purposes only and does not constitute investment advice. I am not a financial advisor. Always do your own research before making any investment decision.

Disclosure: I may hold direct or indirect positions (including options) in any securities mentioned in this newsletter. My opinions are my own and always honest.