A lot of investors – myself included – have lost money on Diageo shares in recent years. Over one year, the alcoholic beverage giant’s share price is down about 30%, while over five, it’s down more than 50%.
Now, Diageo shares could rebound in time, enabling investors to make up their losses. However, it’s worth remembering that when it comes to making up losses in the stock market, we don’t have to do it with the same stocks we lost the money on.
Growing while Diageo’s shrinking
This brings me to FTSE 250 stock Applied Nutrition (LSE: APN). It’s a leading supplier of nutritional supplements.
I think this stock could be a good way to try and make up losses from Diageo. Because the way I see it, this company’s pretty much the direct opposite.
Whereas Diageo sells booze, which is seeing a decline in sales as younger generations and those on weight-loss drugs drink less, Applied Nutrition sells protein powders and hydration solutions, which are booming as consumers spend their money on products designed to make them feel healthy and look good (social media’s helping to drive this theme).
So unlike Diageo, it’s positioned in a consumer goods industry that’s expanding rapidly (the company expects its markets to grow by around 8% a year between now and 2028).
“As health and wellness becomes increasingly embedded in everyday consumer behaviour, we continue to benefit from a larger pool of individuals embarking on, or continuing, their wellness journey.”
Applied Nutrition Founder and CEO Thomas Ryder
We can see this in its sales and share price. For the six-month period ended 31 January, Applied Nutrition’s sales rose 57% year on year (Diageo reported net sales growth of -4% for the six-month period ended 31 December), while over a year, its share price is up about 90% (versus -30% for Diageo, as noted above).
Strong financials and a low valuation
Looking beyond the favourable thematic backdrop and the incredible level of revenue growth, there are a number of things to like about Applied Nutrition from an investment perspective. One is the valuation.
With analysts expecting earnings per share of 12.5p for the year starting 1 August, the forward-looking price-to-earnings (P/E) ratio’s only 17.5. That’s low considering the level of top-line growth.
Another thing to like is the financials. Not only does the company have a very strong balance sheet (at the end of January it had a net cash position of £25.4m) but it also has a very high return on capital – last year it was 49%.
The company’s also trusted, which is important, because it operates in a competitive industry in which there are many different brands (and competition from rivals is a risk).
Finally, it has a very effective business-to-business (B2B) model, selling its goods through established retailers such as Tesco, Asda, and Amazon. This is a cost effective way to gain access to a broad range of customers and expand into new geographic markets and it should help the company scale up over time.
Overall, there’s a lot to like. While competition and consumer spending weakness are risks, I think this stock has all the right ingredients to be an excellent long-term investment and is worth considering for an ISA or Self-Invested Personal Pension (SIPP).
