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Here’s why I’d forget about the Fevertree Drinks share price ‘fad’

In my early investing days, I learned a lot from a Motley Fool colleague who had the knack of identifying what he called ‘fad’ stocks. They’re stocks that capture the mood of the moment, a passing fashion… but typically boom and then bust.

Perhaps they’re selling a new product that’s doing the rounds among young people. Or maybe a company is just making a big deal out of nothing special and advertising it big.

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A what specialist?

Today, I’m examining Fevertree Drinks (LSE: FEVR), whose share price boomed in 2018. When I first saw Fevertree described as a tonic water specialist, my fad alert started sounding loudly in my head.

We’ve had all kinds of booze fads in recent years. Does anyone remember alcopops? Or beer with lemon stuck in the neck of the bottle? Or ready-made cocktails? Whenever I look at the supermarket booze section these days, I see more flavoured gins than just about anything else. But that’s a fad, and it will pass.

Now, Fevertree makes more than just fancy tonic waters, it does all sorts of mixers too. But tonic waters do seem to dominate. A quick check on the firm’s products reveals Elderflower tonic water, Aromatic tonic water, Clementine & Cinnamon tonic water… and many more.

I suspect there probably is a longer-term market for fancy mixer drinks, but not as big as hopeful growth investors think. It’s a market that’s very easy to get into too, and I don’t really see how Fevertree has any kind of protective moat or competitive advantage.

Competition

In my search for Fevertree products, I found ‘botanical brewery’ Fentimans offering Botanical, Pink Grapefruit, Mediterranean Orange, and even Connoisseur tonic waters. Then I found Double Dutch brand Cucumber and Watermelon tonic water.

The big names, like Coca-Cola and Schweppes are getting in on the act too — fancy some Russchian Aromatic Citrus tonic water? And then the big supermarkets, like Tesco, are offering their own brands.

I reckon the young people buying all this stuff in the bars probably won’t even know who makes their mixers. Just as long as they can be seen drinking their fashionable, I don’t know, South Seas Tulip tonic water or whatever, I can’t see them caring. People will just buy whatever the bar happens to stock. Until the ‘fancy mixers’ fad is over.

Shares?

So that’s my take on the products — probably decent enough, but probably set to go the way of all those previous drinking fads. But what about Fevertree Drinks shares?

The share price is way down from its peak, suffering an extra crunch when the firm’s latest year-end trading update was released. On 20 January, Fevertree shares lost more than a quarter of their value in just the one day. The update confirmed all my worst fears about rising competition.

Even after that dip, we’re still looking at a forward P/E of probably about 28 — around twice the FTSE 100‘s long-term average. I think Fevertree is still an overpriced fad stock.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.