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Can Fevertree Drinks plc Beat Royal Dutch Shell Plc In 2016?

There’s no doubt that Fevertree Drinks (LSE: FEVR) has been a blistering success for investors during 2015. The firm entered January with a share price around 175p, which compares to today’s 580p – a 231% uplift.

The big questions are, will the company outperform again in 2016? Or have the shares run ahead of themselves?

A lurch into profits

Fevertree is no ‘jam tomorrow’ speculative share. There’s an understandable reason for the toe-curling valuation we see today. The founders’ vision was to create a premium brand of carbonated mixers for alcoholic spirits to capitalise on what they saw as an established trend towards consumption of premium products. In this case, Fevertree aimed to benefit from the rise of premium spirits.

It worked. Since its launch in 2005 the company has grown and 2015 was the year that the success of its execution really showed up in pre-tax profits. City analysts forecast those profits will be up around 287% by the time we all set light to our Christmas puds at the end of the year.

Executing well

Now, it would have been much more helpful if I had written this article in January rather than December, before this share popped its cork. However, I don’t want to let one omission lead me to another bad decision. After all, it would be easy to dismiss Fevertree on grounds of its valuation – the forward price-to-earnings (P/E) ratio sits at about 45 for 2016. That’s high. But I think the firm is worth keeping an eye on because the business model is compelling and growth could have much further to go.

Fevertree’s high quality mixers often cost more than the spirits they mix, but customers ask for them by name by some accounts. The firm has carved itself a seemingly unassailable niche in the market and now refers to itself as the world’s leading supplier of premium carbonated mixers for alcoholic spirits by retail sales value. That’s quite an achievement for a business that started up just 10 years ago. Today, Fevertree distributes to over 50 countries worldwide. It’s executing well and deserves further research and a place on my watch list.

Commodity prices: weak or just normalising?

Fevertree is a racy, highly rated share. So how about a big-cap stalwart like Royal Dutch Shell (LSE: RDSB)? 2015 hasn’t been quite as kind to Shell. It started the year with a share price of 2225p, which compares to today’s 1508p – a 32% drop. Ouch! Maybe the venerable old firm isn’t the staid stalwart that I’m looking for to shore up the downside in my portfolio after all.

Most of Shell’s challenges boil down to weak commodity prices. But are they truly weak, or is the price of oil and other resources returning to a more stable ‘normal’ range? I think that might be the case. That’s why I’m inclined to hold fire for a while longer before investing in any resource shares such as Shell and its oil-producing peers. Recent events for oil companies, banks and supermarkets underline the risk inherent in all shares – even those of big companies. That’s why I don’t think it’s such a bad idea to consider proven winners with strong underlying businesses such as Fevertree, even when the valuation froths so much that the bubbles get up your nose!

I'm not brave enough to buy Fevertree or Royal Dutch Shell as things stand at the moment, but I do like the look of a mid-cap firm enjoying strong growth that looks set to continue.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.