When it comes to identifying the best stocks on the junior market, Fevertree (LSE: FEVR) would surely make many investors’ lists. After all, it’s hard to ignore a company whose share price 14-bagged between November 2014 and September of this year (thus making early holders significantly wealthier in the process). Factor-in the huge leaps in profit, excellent returns on sales and capital invested and you have a business worth holding on to.
Or do you? I remain cautious on the stock.
Where to now?
Sure, this month’s trading update from the premium carbonated mixer supplier was anything but downbeat.
To recap, Fevertree announced that the superb growth seen in H1 had continued into H2. Highlighting the “exceptional performance” witnessed in the UK, the company stated that the rate of sales growth had been “strong across both the on and off trade“. Having assumed responsibility for “97% of the value growth in retail over the last 12 months“, it’s understandable that management is now predicting full-year figures will be “materially ahead of current market expectations“.
Ordinarily, most stocks would fly on such a bullish update. Not Feveretree. Indeed, over the past few weeks, the shares appear to have lost much of the momentum they displayed earlier in 2017. Therein lies the rub.
At some point (if it hasn’t happened already), beating market expectations will become the norm for the £2.3bn cap, at least in investors’ minds. As such, I think there’s a growing possibility we might see a situation unravel not dissimilar to that seen at online fashion giant and fellow galloping growth stock Boohoo.Com before much longer — a situation in which even a high-performing company is paradoxically punished by a seemingly insatiable market.
With its sky-high valuation of 54 times earnings, negligible dividend yield and — I suspect — growing susceptibility to competition from rankled rivals, I’m not a buyer of this high-quality company at the current time.
A far better purchase, in my opinion, would be Robinsons owner Britvic (LSE: BVIC), particularly after today’s expectations-beating full-year results from the Hemel Hempstead-based business.
Revenue increased 7.7% to £1.54bn in the 52 weeks to the start of October, with 41% of sales generated from outside of the UK. Encouragingly, 5.4% of total revenue also came from innovation, comparing favourably to the 4% achieved in 2016. Although pre-tax profit fell 2.5% to £111.6m, Britvic was quick to reassure investors that this was a consequence of planned investment for future growth.
While cautioning holders that the forthcoming soft drinks levy would create some short-term uncertainty, CEO Simon Litherland added that Britvic — thanks to its extensive brand portfolio, innovation plans and focus on cost management — was “well placed” to deal with any negative consequences.
As a result of adjusted earnings per share increasing by 7.3%, the £2bn cap also saw fit to hike its full-year dividend by 8.2%. With a fully-covered yield of 3.5% now predicted for the next financial year, I’m convinced that the company remains a solid pick for those wanting income from their investments.
Despite rising almost 8% in early trading, Britvic’s shares still look to be reasonably priced, if not the bargain they once were. Moreover, at 15 times forecast earnings, its stock is still a whole lot cheaper than Fevertree’s. For this and the reasons listed above, Britvic gets my vote.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. 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.