Great start

Don’t mistake me for some kind of stock market masochist. No one actually enjoys seeing the value of the biggest holding in their Self-Invested Personal Pension (SIPP) fall by a double-digit percentage. In fact, Smithson’s decline has the potential to hurt more than most. given that investors like me have been spoiled by performance for the majority of its existence. 

The small- and mid-cap-focused fund was launched back in October 2018. No doubt helped by its link to star money manager Terry Smith (Smithson comes from the Fundsmith stable and adopts the same strategy), investors were queueing up to throw their money in the ring. And up until recently, this confidence has been richly rewarded. 

From inception to the end of 2021, the trust delivered an annualised gain of 24.5%. That compares very favourably to the 13% achieved by its benchmark — the MSCI World SMID Index. It also more than justified the 0.9% annual management charge, in my opinion.

What’s gone wrong?

The recent wobble may be due to a number of things. First, there’s the issue of valuation. As a quality-focused fund, Smithson doesn’t look for cheap stocks.

Like its big brother, Fundsmith Equity, it targets companies with valuable brands and huge market shares that generate consistently high returns on the money they put to work. This includes property website Rightmove, mixer-drinks supplier Fevertree Drinks and Domino’s Pizza Group. Unfortunately, such businesses are rarely without friends and priced accordingly. That’s fine when markets are behaving themselves. Less so when investors are fretting over earlier-than-expected interest rate rises.

The fact that almost half of Smithson’s portfolio comes from the IT sector probably doesn’t help either. By sharp contrast to last year, companies in this space have now fallen out of favour. Thankfully, Smithson makes a point of avoiding the unprofitable fluff whose share prices are now falling faster than Boris Johnson’s approval ratings. Nevertheless, investors seem to be throwing the baby out with the bathwater.

The aforementioned performance of its shares may have also seen a few profit-takers emerge from the shadows. After all, Smithson’s market-cap had grown to £3.5bn by the end of December. That’s already pretty large for a trust that is designed to invest in companies lower down the food chain. In fact, the median size of business in the portfolio is actually £10bn! Moreover, manager Simon Barnard’s investment strategy is still to be comprehensively tested and some people may be getting out while the going’s good.

Loading up for the recovery

While I wouldn’t mind being proven wrong, I certainly don’t expect Smithson’s annualised return to remain at the percentage it stood at in December. As a fuss-free way of accessing high-quality businesses from around the developed world however, it still strikes me as a perfect core holding.

I believe that good businesses tend to outlive bad ones. I also regard myself as a long-term growth investor. As such, it makes sense for me not to panic about Smithson’s sticky patch just yet.

The post Top investment trust Smithson is flagging and I’m buying appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity. The Motley Fool UK has recommended Dominos Pizza, Fevertree Drinks, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Measured over five years, Ocado is up 599%. Over the same period, Fevertree is up 299%. They’re among the best-performing UK shares of the pandemic,too. Over 12 months they have grown 53% and 168% respectively.

But as companies get bigger, the pace of growth must eventually slow. FTSE 100-listed Ocado now has a market cap of almost £15bn, while Fevertree is worth more than £2.5bn. It’s not so easy to grow 600% or 300% from that starting point, but expectations remain high.

The Ocado share price slips

Investors have been pricing in plenty of future growth, which makes them liable to be disappointed by the mildest setbacks. That’s what has happened today, as both UK shares have fallen, despite posting halfway decent results.

The Ocado share price is down 4.27%, while Fevertree is down a hefty 14.93%. That’s bad news for them but good news for me, as I now have an opportunity to buy these two UK growth shares at a reduced price.

Ocado Retail has benefited from Covid lockdowns, as more people have opted for home deliveries. Today’s trading statement reported a 40% rise in sales for the 13 weeks to 28 February. Christmas revenues totalled £599m against £428.8m last year. Chief executive Melanie Smith predicted “strong growth over the coming years as we continue to lead the charge in changing the UK grocery landscape, for good”.

So why are investors so negative about this top UK share? One reason is that future comparatives will not be as attractive, as trading normalises. The other is that the Ocado share price is massively expensive given that it has made a loss for the last four years. It is betting the farm on growth, in the hope of establishing itself as a global tech company for supermarket deliveries.

That story still holds good and I would consider buying Ocado for long-term growth, while expecting more bumps along the road. It’s down 20% in the last month, partly due to the wider risk-off tech stock sell-off. That’s good enough for me. I’d buy.

I’d choose just one of these UK shares

Fevertree is also expensive, trading at 50 times earnings, and needs to keep investors sweet by showing continued growth potential. The mood is sour today, as preliminary profits dropped 29% to £51.6m due to falling sales in bars and restaurants, which in non-Covid times make up almost half of its revenues.

Off-trade and retail sales were better than expected as more people have been drinking at home. Management also increased the dividend. This isn’t the juiciest income stock, with a forward yield of 0.8%, but cover of 2.5 gives scope for growth.

Fevertree should benefit once people are liberated to celebrate their freedom with a craft G&T and premium mixer. The big question is whether Fevertree can really crack the US, where revenues grew 23% to £58.5m. They already total more than half UK revenues of £103.3m, so the outlook is promising. This UK shares is just a bit too expensive for me, though. I’d buy Ocado first.

The post Top UK shares Ocado Group and Fevertree Drinks are falling today. Here’s what I’d do now appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Can anything save the Ocado share price?

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Fevertree success story

During the last decade, Fevertree smashed analysts’ forecasts time and time again. A strong product and branding provided the basis for success. Coupled with huge growth in the UK craft spirits market, the company was in the right place at the right time to enjoy huge sales.

Since the highs of 2018, the Fevertree share price has fallen back to around the £24 mark. Why is this, and should investors be braced for a rocky ride? In 2019 Fevertee posted growth of 9.7%. In almost any scenario this would make for happy investors, but the track record since float shows this as comparatively poor performance.

Fevertree – pandemic problems

First-half revenue was down 11% due to the impact of on-trade sales. Bars and restaurants account for 45% of sales, so due to lower revenues and higher costs, Fevertree suffered a 35% fall in profits. Paul Summers looked at this in detail earlier this year.

The dividend was slightly increased to 5.41p, but as this is only a yield of around 0.7%, even reinvesting these dividends would not contribute hugely to investment growth. Potential investors must focus on the case for future sales increases as a reason to purchase the stock.

The future for the Fevertree share price

Even before the Covid-19 pandemic, sales in the UK had begun to fall. It is wise to consider if this is due to the boom period for craft spirits coming to an end. There is a limit to how much Fevertree can sell in the UK, and the data shows that rapid growth is over.

Fevertree must therefore focus on international expansion to grow sales. The US would be the logical market to focus on, but differentials in customer tastes make the situation more complex. The prevalence of dark spirits such as bourbon or rum in the US mean that Fevertree’s portfolio there will depend on products such as cola, rather than tonic water. This market is more crowded and will be difficult to penetrate.

Fevertree share price – an investment case

In my opinion, Fevertree has all the hallmarks of a sound investment case. Founder Tim Warrilow still remains as CEO. This gives good stability and continuity of vision. Businesses such as Superdry have demonstrated in recent years that removing this aspect (in their case, ongoing battles over the role of Julian Dunkerton) has negative impacts on investor confidence.

Fevertree have also demonstrated sound growth in sales, profits, and earnings per share, with dividend increases to boot.

And yet, I won’t be buying in. The price-to-earnings ratio currently sits at 50. Investors in this case are insatiable. Success is expected to be followed with more success. That demand becomes reflected in a very steep asking price. As a general rule of thumb, I like my investments to have a P/E ratio no greater than 20. I still believe Fevertree to be a sound long-term prospect, but would like to see the current price come down before investing.

The post The Fevertree share price. Is it time to buy in? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

bwatson1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Premium mixer-maker Fevertree Drinks (LSE: FEVR) made the most of the gin revolution to become one of the fastest growing UK shares on the market. Early-stage investors will have made big money from Fevertree. Bandwagon jumpers won’t have been so lucky.

The excitement peaked in 2018, and those who bought at the top are still nursing their hangovers. The Fevertree share price is down almost 50% over two years, and the decline started before this year’s stock market crash. Does today’s low price offer an attractive entry point?

Stock market crash recovery play

Please don’t approach Fevertree as a whizzy growth stock. As a £2.35bn concern, those days are over. Yes, the team has spotted a global opportunity in the US, Canada, and Australia, but there’s no guarantee it’ll repeat its astonishing domestic success. 

That said, the Fevertree share price has recovered strongly since the stock market crash, rising more than 80% measured over six months. That’s why we at the Fool always urge readers to buy shares when prices are down. You can do well when a bargain stock bounces back.

Last week, the group reported resilient first-half revenues, down just 11% year-on-year to £104.2m. Not bad, given that pubs and bars were shut. Fortunately, enthusiastic drinkers mixed their cocktails at home instead.

The group’s net cash balance actually increased to £136.9m, while management hiked the dividend 4% to 5.41p. Fevertree is still expensive, trading at 40 times earnings. The yield is just 0.74%.

Future growth opportunities lie abroad, but don’t buy expecting a repeat of past glories. One to buy in the next stock market crash perhaps?

Earn income in an ISA

Few investors buy stocks from the grocery sector in the hope of generating massive share price growth. These days, long-term dividend income is the main attraction. A decade ago, the Morrisons (LSE: MRW) share price traded above 300p. Today, you can buy it for 180p. Is that an attractive entry point?

While most UK shares tumbled in the March stock market crash, supermarket stocks like Morrisons were a rare exception. People still need consumer staples. Last week, the FTSE 100 group reported an 8.8% rise in total revenue (excluding fuel) to £7.6bn.

Despite that, underlying pre-tax profit fell 25.3% to £148m, because of £155m extra costs related to Covid-19, and customer preference for lower-margin products. Many investors have been intrigued by its supply arrangement with Amazon, which could help Morrison’s make up lost ground in online sales. That will take time to bear fruit though.

The main attraction for this stock market crash survivor is dividend income. Right now, Morrisons yields 3.74%. We don’t yet know whether there’ll be a special dividend this year. This depends on the pandemic.

I’d still consider buying and holding the stock for long-term income. Today’s low entry point of 12.35 times earnings looks tempting.

The post Stock market crash winners: I’d consider buying these 2 UK shares in an ISA today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Buying into Fever-Tree after the stock market crash at 935p a share and selling now would net you a cushy 156% return. 

Fever-Tree, like many of its AIM-listed peers, rides the waves of stock market volatility. The current trend is upwards, so why realise that pleasing return now?

Fever-Tree is a growth stock slowing down

Quite simply, Fever-Tree Drinks is a growth stock slowing down. Historically, the impressive stock price performance reflects the market’s expectations for the carbonated mixers supplier.

Until 2019, the company’s revenues, profits, and assets were increasing year on year and the market loved it. But, growth stocks can’t climb forever at the same rate.

Indeed, in 2019, a 10% rise in revenues did not translate into growing profits as increased costs and reduced domestic sales took their toll. Despite a strong balance sheet, Fever-Tree wasn’t meeting analyst expectations, sharply depressing the share price, and slowing the growth curve. 

Understandably, every investor wants above-average returns, and many will view growth stocks, like Fever-Tree, as a means of achieving this. But past growth is not an indicator of future growth and companies with good records usually sell at high prices. 

An investor can be right about a firm’s prospects but also pay too much for a stock, lowering returns on their purchase.

Fever-Tree Drinks share price is expensive

Fever-Tree Drinks currently trades around 2,394p. Many share price websites will show a price-to-earnings (P/E) ratio for Fever-Tree, around 47. This ratio takes the current price of the share and divides it by 2019’s earnings per share (EPS) of 50.3p.

Usually, a lower ratio indicates better value for money. However, if the year in question was unusually profitable, it’s easy to overestimate a company’s proper value. Using a multi-year average reduces the odds of overestimating the true value of a company.

Over the last five years, Fever-Tree’s average EPS is 35.5p, giving a massive P/E of 67, against an industry average of 22. I think Fever-Tree Drinks is vastly overpriced, even before considering market conditions.

Fever-Tree faces market uncertainty

45% of Fever-Tree’s revenues come from ‘on-trade’ sales, meaning they arise from pubs and bars where alcohol can be sold to drink on-premises. It’s not yet clear what will happen to the pub trade in the short term due to the government’s coronavirus fears.

In addition, Fever-Tree’s artisan products, innovative at first, are now facing stiff competition from the likes of Cobell and other mixer manufacturers. Unless the firm can carve itself a new niche, it’s growth curve will flatten further.  

Also thinking this way is fund manager Nick Train. His fund bought Fever-Tree for under 1,400p, not long after its sharp share price plunge earlier this year. He notes that the company needs to be “about more than tonic” and is eyeing stateside growth potential in ginger ale and soda water products. 

There is a definite future for Fever-Tree; its solid balance sheet should sustain the company through short-term trouble. 

However, its shares are too risky to buy at current prices. Upwards momentum for the stock makes it a good time to sell. I’d buy it again once the market adjusts. Just like Nick Train.

The post Fever-Tree Drinks share price: Why I’d sell today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The following two have been among the most exciting stocks on the market in the past five years, but I would only buy one of them today.

Boohoo Group

The Boohoo Group (LSE: BOO) share price is up an incredible 1,182% in just five years, which would have turned £10k into more than £128k, which is serious growth.

The Boohoo share price has maintained its momentum, up 71% over the past 12 months. Investors who bought a year ago fearing it might be running out of momentum will be celebrating today. It is now crowned King of AIM, with a market cap of £3.68bn.

The big attraction of Boohoo, which owns brands Karen Millen, Nasty Gal, PrettyLittleThing, Coast and MissPap, is that it has set its sights on becoming a global retail giant. This is always a high-risk strategy, one that has confounded Tesco and many others, and failure could bring the share price crashing down. Success, on the other hand, would send it shooting to the stars.

Boohoo is priced for growth, trading at 74.1 times forward earnings. However, City analysts expect those earnings to continue to grow by an impressive 33%, 26% and 24% over the next three years, which if achieved, would pull down its valuation to a more modest 37.3 times earnings. 

Its price-to-earnings growth ratio of just 1.9 looks far from demanding. Given that it has a meagre 0.4% share of the US and EU clothing market, Boohoo could just pull it off. It has little margin for error though.

Fevertree Drinks

Craft mixer specialists Fevertree Drinks (LSE: FEVR) has lost its fizz, as its explosive growth phase seems to be over. Over five years, it would still have turned £10,000 into £76,887, but if you bought 12 months ago, your £10k would be worth closer to £6k. Ouch!

The Fevertree share price dropped 27% on Monday alone, as the group downgraded its profit growth projections, blaming “subdued” festive trading in the UK. As a gin and tonic fan myself, I think Fevertree could struggle to build UK sales from here. Its novelty value has subsided, competition has increased, Schweppes has sharpened up its act, and the gin craze cannot last forever.

US sales are rising at a faster pace, up 33% to £47.6m, with Europe and the rest of the world up 16% and 32% to £64.4m and 15.8m, respectively. It needs to build on these to compensate for the slowing domestic market, which still makes up half of revenues, but it won’t be easy.

Today could be a tempting entry point, given that Fevertree’s dizzying valuation has been trimmed to ‘just’ 32.3 times forward earnings, and those earnings are still projected to grow a solid 12% in 2021, and 13% the year after. However, I would rather buy into Boohoo’s momentum.

Alternatively, start hunting for tomorrow’s multi-bagger instead.

The post The Boohoo share price turned £10k into £128,200k in 5 years. Here’s what I’d do now appeared first on The Twelfth Magpie.

More reading

• Prediction: by 2027, this battered FTSE AIM stock could turn £3,000 into…

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, since September of last year, investors have started to cool on the company. After reaching a high of nearly 3,800p, the stock has since slumped to 1,758p. 

Slowing growth

Investors have been selling the stock as the City has downgraded its growth forecasts for the business. Analysts are now expecting earnings growth for the full year of just 7%, a significant drop from the 100%+ growth rates Fevertree has been able to achieve in the past. 

But I think this could be an excellent opportunity to snap up shares in the business at a relatively attractive valuation. 

Historically, the market has been willing to pay around 50 times earnings for shares in Fevertree. At the time of writing, the stock is trading at a forward earnings multiple of 30, falling to 27 next year based on current City estimates. That’s not too cheap, but it’s not too expensive either.

For example, shares in the US drinks giant Coca-Cola are dealing at a forward P/E of 25. Fevertree has higher profit margins and a stronger balance sheet than Coke. In my opinion, that goes some way to justifying the high multiple.  

Recovery under way

If you’re not interested in Fevertree, Aggreko (LSE: AGK) offers a global growth platform at a lower price. 

The company provides power generators around the world, and business has been mixed over the past five years. Earnings per share have declined by around 40% since 2013. 

Nevertheless, the business is expected to return to growth in 2019. City analysts have pencilled in earnings growth of 7% for the year, marking the first improvement since 2016. According to a trading update published by Aggreko today, the company is on track to hit this target. 

Analysts are forecasting earnings growth of 26%, which puts the stock on a 2020 P/E of 12.5. For a company that has demanded a multiple of as much as 20 times earnings in the past, this looks too cheap to pass up.

On top of the discount valuation, shares in Aggreko also support a dividend yield of 3.4%. The distribution is covered 1.8 times by earnings per share, so investors will be paid to wait, even if the company’s turnaround takes longer than expected. 

Cash cow

The final company I would buy with £3,000 today is homebuilder Berkeley Group (LSE: BKG). The UK’s housing market is booming, and a structural undersupply of properties across the country suggests homebuilders will be kept busy for years to come.

Berkeley predominately builds luxury property in London and the south east, so it’s not exposed to the same kind political risks as its peers that have leaned heavily on the government’s Help to Buy scheme in recent years. In its financial year to the end of April 2019, Berkeley built 3,698 new homes at an average selling price of £748,000.

What I like about it is its cash generation. At the end of its 2019 financial year, the group had nearly £1bn of cash on the balance sheet. A large percentage of this total is earmarked to be returned to investors.

The stock currently supports a dividend yield of 4.4% and the current level of cash on the balance sheet is enough to support this dividend for up to four years, according to my calculations. 

The post How should I invest £3k? The 3 shares I’d buy today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After launching in 2005, Fevertree now claims to be the world’s leading premium carbonated mixer supplier for alcoholic drinks when measured by retail sales value. The firm distributes to more than 70 countries, and the founding directors’ vision to grow its high-quality mixer offering alongside an expanding market for premium spirits has been realised in spectacular fashion.

Astonishing total returns

Early shareholders have done well. Since the firm’s initial listing on the stock market at the end of 2014, the share price is up more than 1,300% at today’s share price close to 2,541p. But it’s been higher, peaking near 4,000p in September 2018 before crashing back down more than 40% and then rebounding a little to today’s level.

The shares have been weak, but the numbers aren’t. Revenue rose 40% in 2018 and diluted earnings per share moved 36% higher. The company’s good trading shows up as real money with the net cash figure on the balance sheet up 64% to just under £84m. The directors expressed their satisfaction and confidence in the outlook by slapping 36% on the total dividend for the year – the operational and strategic success story continues.

Chief executive and co-founder Tim Warrillow explains in the report that during 2018 the company strengthened its position in the off-trade market in the UK. There was significant progress in the US too, with the firm setting up a wholly-owned operation to directly manage marketing, sales and distribution.

Solid inroads were made in Europe as well. Warrillow reckons the company’s strengthening global distribution network positions it well “to drive the international opportunity,” and ride the trend as the premium long mixed drink “continues to gather momentum around the world.”

Sustainable growth ahead

The outlook is positive and the directors think the firm can deliver long-term, sustainable growth. But will that translate into decent total returns for shareholders from where we are now? Perhaps the biggest hurdle to overcome is valuation.

As I write, the forward-looking price-to-earnings ratio sits at almost 43 for 2019 and the anticipated dividend yield is 0.62%. City analysts following the firm expect earnings to lift by percentages measured in the teens this year and next. But that’s short of the robust double- and triple-digit increases we have seen over the past few years.

Indeed, it looks as if Fevertree is maturing and settling into a more gentle rate of growth. That’s normal, of course. No business can keep up a frenzied growth rate as it gets larger. But with that being the case, does Fevertree deserve a ‘frenzied’ valuation now? I don’t think so. I reckon the most likely outcome going forward is that the share price will tread water until the valuation falls to match the rate of growth in earnings.

There’s too much potential for an investment in Fevertree to stagnate – perhaps for years – so I’m avoiding the stock now.

The post Fevertree Drinks: should I buy, sell or hold on to these barnstorming results? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Nearly a year on, and I’m willing to admit that I made a bad call. Soon after I issued my ‘buy’ advice on the 13th of March, the stock spiked and rose more than 50% between the beginning of March and the beginning of September. However, in the months after, the stock has declined and is currently trading only 8.3% higher than where it was at the time of my recommendation.

This is a sharp slow down from a company that has seen its share price rise more than 300% in just three years. Now, I’m beginning to wonder if this could be the beginning of a more substantial decline.

Slowing growth

Shares in Fevertree have languished even though the company has issued several upbeat trading updates over the past 12 months. The latest update, published at the beginning of 2019, informed investors that full-year revenue for the group is expected to rise 39% year-on-year, thanks to “very strong” revenue growth in the UK and “significant operational progress” in the US.

The problem is, no matter how you look at it, Fevertree’s growth is slowing. Between 2016 and 2017, revenue increased 70%, that’s nearly double the growth rate the company expects to report for 2018.

Analysts are expecting a further slowdown in 2019. They’ve pencilled in revenue growth of just 19%, although the company does have a track record of outperforming City expectations.

Also, I’m shocked that Fevertree’s US revenue is growing so slowly. According to the latest trading update, revenue in this region increased by 21% in 2018. Considering the company only has a small presence in the US, and it’s such a massive market, I wouldn’t have been surprised if the group reported a growth rate of 50%, or more. In the first half of 2018, US revenue was only £15.1m, implying the firm has increased sales by around £6m for the year. 

As some estimates put the size of the total US carbonated drinks market at more than $350bn, Fevertree’s relatively minuscule sales growth doesn’t instil confidence in the brand.

Time to sell?

With growth slowing, I think it’s going to become harder for the company to continue to justify its premium valuation. The stock is currently trading at a forward P/E of 53, falling to 46 if it meets growth forecasts for 2019. This multiple makes it one of the most expensive companies on the London market. If growth slows further, it’s difficult to see how it can continue to sustain the premium rating.

Even based on current earnings growth, the stock looks expensive. It’s trading at a PEG ratio of 3.5. There’s no evidence of support either. The shares currently support a dividend yield of 0.6%.

All in all, considering Fevertree’s current valuation and the company’s slowing sales growth, I think the shares are due for a re-rating. And the decline could be significant.

The post Why I’m BEARISH on this stock that’s soared 300% in just 3 years! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Does that price offer value? Let’s take a closer look as to whether now is the time to get on board this growth stock, after the recent 30% share price fall.

Growth story

I have to admit, I’ve been impressed by the growth story here. Almost every bar, pub and restaurant I’ve visited lately has served Fevertree mixers and there’s no doubt they have been a great hit with drinkers. I can see the appeal – if you’re spending money on premium spirits, you might as well pay for a premium mixer too, as around three-quarters of your drink is likely to be mixer.

Powerful growth

Looking at the financial performance, there’s no doubt it has grown rapidly in recent years and is still growing at a formidable pace. For example, in its half-year results in late July, Fevertree reported revenue growth of 45%, diluted earnings per share growth of 36% and an interim dividend hike of 40%. Management also advised that the outcome for the full year will be “comfortably ahead of its expectations.” Fevertree clearly has strong momentum at present and after recently signing a distribution agreement with SGWS – the largest North American wine and spirits distribution company – the growth story here looks like it could have further to run.

Valuation

But what about the valuation? FEVR has often traded at eye-wateringly high multiples in the past – is the situation any different now? 

Looking at consensus forecasts, analysts expect the group to generate earnings per share of 48.2p for the year ending 31 December. As such, the stock is currently trading on a forward-looking P/E ratio of 58.3, which is certainly high. That kind of valuation doesn’t leave much margin for error in my view. For example, if growth was to slow here in the UK or the US expansion experienced setbacks, the stock could come under further pressure. A P/E-to-growth (PEG) ratio of 2.5, while not outrageous, suggests that investors are certainly not buying growth at a bargain level.

Another ratio that concerns me is price-to-sales. Despite the recent share price fall, the group’s market capitalisation is still large at £3.15bn. With analysts forecasting sales of £225.7m for FY2018, the price-to-sales ratio on a forward-looking basis is 13.96, which is also quite high. So FEVR’s valuation is clearly quite expensive, even after the share price drop.

Brand power

The other issue that concerns me is the company’s competitive advantage and more specifically, the power of the brand. Yes, Fevertree has great-tasting products, but is there anything to stop rivals entering the market with fancy new mixers and stealing market share? To my mind, it doesn’t yet have the brand power of a Coco-Cola or a Sprite that could help it protect its profitability.

Overall, I have concerns regarding the investment case here, mainly on valuation grounds. As such, I’ll be keeping Fevertree on my watchlist for now and waiting to see how things unfold.

The post Is Fevertree’s share price a bargain after falling 30%? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon has no shares in any companies mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.