It may seem foolish (with a small ‘f’) to recommend a company whose shares have more than doubled over the past year, but the momentum in its share price could be seen as an indicator that additional gains could be yet to come.
The premium carbonated drinks maker Fevertree (LSE: FEVR), which has seen the value of its shares soar by 234% since its IPO in November 2014, appears to be a genuine growth story.
The rise in the value of its shares has been matched by the very rapid pace of revenue and earnings growth. In its latest trading update, management reported revenue growth of 77% in the second half of 2015, which not only represents very robust growth, but also that growth is accelerating too. Growth in the first half of 2015 was 61%, compared to a more modest 43% in second half of 2014.
Fevertree is due to announce its full year results in March, and analysts expect it will earn adjusted earnings of 11.9p per share. This will give its shares an estimated P/E of 46.5. That seems very expensive, but bear in mind we are dealing with a very fast growing company.
Its PEG ratio — which is calculated by dividing the estimated P/E ratio by the earnings growth rate — is perhaps a better reflection of value for growth stocks. Fevertree, which will likely see a more than tripling in adjusted earnings, has PEG ratio of just 0.15.
However, there are downside risks, too. Consumer tastes are quickly changing and failure to respond to evolving tastes could lead the company to fall behind. Fevertree’s near 50% gross margins are clearly envied by its competitors, who are no doubt keen to grab a slice of such a profitable and growing market. And as the drinks industry is fiercely competitive, Fevertree will have a tough job maintaining its growth rate.
Shares in Sirius Minerals (LSE: SXX) have fallen 26% since the start of the year, but I believe the company’s long term prospects remain bright. Falling fertiliser prices have hit its shares hard, but as Sirius Minerals is still at an early stage of development, lower potash prices now could actually be a godsend to the company’s future prospects.
Lower prices discourage its competitors from exploratory activity, halt new developments, and force out high cost producers, which would all lead to lower supply and thus support higher prices later on. Long term fundamentals are very much supportive of higher potash prices.
Global demand for food is soaring, as both the population and meat consumption continue to grow, whilst arable land supply is shrinking because of soil erosion and pollution. Furthermore, the supply of potash is limited and the vast majority of its production is controlled by just a handful of companies.
Shares in fashion retailer JD Sports (LSE: JD) have seen a smaller pull-back with the recent turmoil in the markets. It seems that the market remains confident about the JD Sports’ growth prospects, with the company reporting a very strong set of trading figures for the Christmas period. Like-for-like store sales expanded 10.6% in the five weeks to the New Year, and the company recently reported that earnings for the full year will likely exceed analysts’ expectations.
Analysts have since upgraded their forecasts and now expect JD’s underlying EPS will have grown 46% to 58.7p in 2015/6, with another 12% growth pencilled in this year. This puts its shares at a very reasonable estimated P/E of 17.6 and a forward P/E of 15.7.