Developer and supplier of premium mixer drinks Fevertree (LSE: FEVR) used to be one of the market’s hottest stocks.
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.
