Last week was a pretty brutal one for most equity investors with the FTSE 100 and FTSE 250 indexes both dipping over 4% in five days.
Particularly hard hit, however, were high-growth stocks listed on the Alternative Investment Market (AIM). Mixers supplier Fevertree Drinks (LSE: FEVR), fast-fashion king ASOS (LSE: ASC), and litigation specialist Burford Capital (LSE: BUR) all endured double-digits falls, despite recovering slightly on Friday.
Warren Buffett famously preaches the strategy of being ‘greedy when others are fearful’. With confidence likely to remain fragile, is it therefore time to pick up shares in these former market darlings?
Go back one month and shares in Fevertree Drinks were trading as high as 4,000p each. In only a few weeks, the very same stock has tanked 27%, even after taking into account yesterday’s relatively minor rally. That’s got to be a rather bitter pill for holders to swallow, particularly those who took part in August’s placing at 3,450p a pop.
Clearly, this dramatic drop shouldn’t be regarded as a sign that Fevertree has run into trouble trading-wise. The business revealed revenue growth of 45% for the first six months of 2018, coupled with a 35% increase in adjusted EBITDA.
Trouble is, Fevertree’s valuation still looks demanding despite its recent spanking. On a forecast price-to-earnings (P/E) ratio of 57 yesterday, it’s still a screamingly expensive share to consider purchasing.
It’s a similar story over at £4bn-cap ASOS, with the online giant trading on 40 times earnings for the 2018/19 financial year (which began at the start of September), despite being 24% cheaper to acquire than it was a week ago. Then again, its record of stellar growth means the company’s stock has rarely been on sale.
Nor is this the first time the stock has fallen heavily. Back in 2014, its price went from just over 7,000p to a low of 1,870p in just eight months — another reminder of how backing popular growth companies can often backfire when they are priced to perfection.
While hindsight is no doubt useful here, the fact that it recovered over the years should at least give comfort to those still holding.
Of this trio of falling stars, however, Burford Capital is probably the only one whose valuation seems anywhere near attractive at the current time.
Down roughly 18% from the start of October, a P/E of 19 is a world away from the prices attached to Fevertree and ASOS. A PEG ratio of less than 1 also implies that new owners would be getting a lot of bang for their buck. The equivalent ratios for Fevertree and ASOS are 3.06 and 1.73, respectively, based on analyst forecasts. The lower this number is, the less investors are paying for growth.
A market leader in its industry, Burford continues to grow the returns it generates on the capital it invests. Debt, while rising, is still reasonable.
No one can say for sure whether Friday’s bounce was an indication that the recent rout is now over. The expectations of more interest rate rises in the US (which would heap more pressure on businesses and consumers) could mean that global equities may continue to struggle going forward.
As always, the Foolish philosophy hasn’t changed. Buy great companies for the long term, don’t over-pay, re-invest any dividends, stay diversified, and try not to meddle. Easier said than done, of course.
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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 ASOS. 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.