I have always been wary of momentum stocks, worrying that the flow of fun will dry up shortly after I add a drop to my portfolio. Here’s one that still seems to have plenty of fizz in the bottle.
Just the tonic
Premium drinks mixer supplier Fevertree Drinks (LSE: FEVR) has thrown quite a party since its shares started trading at around 160p in November 2014. Today they trade at 1,700p, making this a 10-bagger in a mere two-and-a-half-years. I have looked at this stock before and was worried about joining the party too late, but I shouldn’t have been so shy. Its share price is up another 30% in the last three months alone.
Fevertree, which in today’s AGM statement describes itself as “the world’s leading supplier of premium carbonated mixers”, is understandably optimistic for the future. Chairman Bill Ronald talking up “another exceptional year” as the group continues to gain market share in both the on- and off-trade, and across all its markets.
Give me Fever
This £2bn company is a pioneer and market leader in the rapidly expanding premium mixer category. It has been amply rewarded for spotting the gin revolution’s early potential. As more artisan gin brands became available, it made sense that drinkers would want a wider choice of mixers than the limited mainstream options, packed with cheap artificial sweeteners and flavours.
Its board said today that full-year 2017 results should be comfortably ahead of current market expectations, with further progress to be reported in its July interims. The share price is largely unstirred, perhaps because Fevertree now trades at a premium valuation of more than 70 times earnings. That is quite a stretch, even with earnings per share (EPS) forecast to rise a healthy 9% this year and 11% next. Fevertree is unlikely to 10-bag from here but should continue to bubble away nicely.
Global spirits giant Diageo (LSE: DGE) is a very different creature altogether, with a market cap of a massive £57.77bn, and a vast global range of spirits brands, both mainstream and premium. After a patchy few years its share price is buzzing again, rising 22% in the past 12 months.
Last week chief executive Ivan Menezes said the company remains on course to deliver a stronger financial performance, consistent with its medium-term objective of mid-single-digit organic top-line growth. He puts recent successes down to putting the consumer at the heart of the business, better brand building, innovation and a focus on discipline and efficiency.
Sales have been rising strongly lately, leaping 15% in the six months to 31 December, with operating profits up 28% to £2.06m, fuelled by favourable exchange rates. Like Fevertree, Diageo doesn’t come cheap, trading at more than 25 times earnings. The yield is relatively low at 2.58% but management remains progressive, recently hiking it 5% to 23.7p per share.
Momentum is with Fevertree but Diageo is now setting the pace, with forecast EPS of 18% in the year to 30 June 2017, followed by a further 9% the year afterwards. Together they could make the perfect combination.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. 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.