Today I’m taking a new look at two previous growth shares that have crashed back to earth, but which are both showing renewed signs of share price bullishness. Fallen growth shares often rebound strongly, but which, if either, of these two would I buy?
Fevertree Drinks (LSE: FEVR), the company named for its first product, a fancy tonic water, has gone on to produce a range of upmarket mixers at a time when things like flavoured gins are all the rage.
The Fevertree share price peaked at over 4,100p in September 2018, which put it on a price-to-earnings ratio of 77, based on that year’s eventual 56.4p earnings per share. Sure, earnings had leapt from just 2.87p in 2014, but it was a new growth company starting from nothing – and a valuation that high was madder than mad.
The share price crashed, and by early November it stood at just 1,697p for a loss of 59% from its peak. In the past couple of weeks, however, the shares have spiked up again, gaining 32% to reach 2,246p as I write, boosted by a year-end trading update that spoke of expected revenue growth of 12% to 13% for 2019.
That looks impressive, but growth in its biggest market in the UK has almost halted, and I see that as a bad sign. And it still leaves the shares on a forward P/E of 37.
The other problem I see is that the premium mixer business has no real barriers to entry and the more established companies can easily get in on the act – and are doing so. I don’t think Fevertree shares should be valued much above Britvic‘s, for example, which are on a P/E of under 17.
Shares in Purplebricks (LSE: PURP) have also started to pick up, and again I’m wondering whether it’s time to buy.
Purplebricks was a disaster for Neil Woodford, who invested big when the share price was climbing towards more growth-stock madness. From a stratospheric peak in July 2017, Purplebricks went on to lose 80% by June 2019, as it became increasingly clear that the company had badly overstretched itself long before it was expected to turn its first profit.
But again, a November trading update has helped give beleaguered shareholders a bit of a breather, and from a low point in May this year the shares are now up 16%. Saying that, the effect of the update didn’t last, and the share price has slipped back again in the days since.
Purplebricks isn’t expected to report a profit until 2021, and even then the very low expected earnings and the implied P/E multiple of 96 doesn’t tell us much. We really need to see what sustainable profit levels will look like to be able to put fundamental ratios into any kind of perspective.
Until then, I really don’t see what is actually so different about Purplebricks. The ‘no commission’ thing that features so heavily in its TV ads really just means it will charge in a different way – via a flat fee. And that doesn’t change the competitiveness of the market at all, with commission-based estate agents entirely free to offer lower overall charges. No, I’m keeping away from Purplebricks too.
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Alan Oscroft 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.