When you see a stock in your portfolio register a fall or gain of a few percent in a single day, you can usually attribute it to normal market trading conditions. However, a move in double-digits suggests something serious has happened, which deserves closer examination.
To this end, yesterday the share price of Fevertree Drinks (LSE: FEVR) fell by 27% down to 1,453p, a level not seen since March 2017. What caused it?
Catching a fever?
In short, the share price tumble can be put down to a trading update that showed downgrades to most of the key financial metrics for 2019. I use the word ‘downgrade’ specifically, as there is still growth happening at the business, just not as much as the market was anticipating.
For example, revenue is expected to come in at £260.5m, which represents growth of 10% year-on-year, but is a downgrade from the trading update from last summer. And this is much smaller growth than seen in 2018, when sales were up by 40%.
UK not performing
Another reason why the share price was hit especially hard was that the issue appears to be focused here in the UK market, which is the home of the business. The UK fell by 1%, in contrast to trading abroad which grew by 33% in the US and 16% in Europe.
For me this is the biggest concern. The company is still growing (as the revenue projection for last year shows) at a good rate, but the fact that this growth is being hamstrung by the UK is disappointing. Britain still accounts for almost half of the revenue for Fevertree, so if this trend continues, then the impact will be big on the overall revenue figure for the group.
Where do we go from here?
You can make a sound argument that the trading update from Fevertree is reflective of the retail/consumer products sector as a whole, and is potentially the start of various other downgrades that we can expect from the wider industry. UK retail sales for December fell by 0.6% versus an expectation of 0.7% growth, showing that the whole high street felt the pinch from consumers spending less.
If you believe this really is a sector-wide (rather than company-specific) issue, then I would not suggest selling Fevertree on this share price fall. Why? Well, on a relative basis, I still think it will outperform its peers. The strong growth seen in previous years and diversification into new markets should allow the business to ride out a slowdown here in the UK better than purely domestic beverage suppliers.
However, if you feel that a strong firm being seeing slower growth due to wider UK weakness is an indication that no business is immune to a slowing economy, then consider carefully whether you want to hold on to the stock.
I tend towards the former view and think the share price fall feels exaggerated, given that the firm is still growing year on year and has a strong position in the market. I would look at this as a buying opportunity.
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Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. 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.