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Why I think you should sell Fevertree stock right now

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Fevertree (LSE: FEVR) has taken its shareholders on a big volatility roller coaster ride. The stock listed at 170p in 2014 and reached a high of over 4,000p last September, before plunging to as low as 1,700p last month – a drop of over 57% from peak to trough.

The low-hanging fruit has been picked

One reason why Fevertree did so well in the past is that it was always ahead of the broker curve. No broker wants to be too optimistic in their estimates on growth stocks, just in case they are wrong. This means that any company that is a top performer can consistently beat broker expectations, with the stock seeing a re-rating when it becomes apparent that the business is excelling. 

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Fevertree is a great product. Founded by Tim Warillow and Charles Rolls in 2005, the company managed to take a stab at Goliath and ended up with the lion’s share of the mixer market. It’s a story that will be given as a marketing example in universities for years to come – Fevertree isn’t a product. It’s a feeling. If you’re having friends round, you don’t buy the supermarket’s own branded tonic (even if you can’t taste the difference), you buy Fevertree. 

Fevertree caught the UK market leader Schweppes asleep at the wheel. It took Schweppes a while (years, in fact) to come out with its own premium mixer in the form of Schweppes 1783. But it’s too late to mount a challenge for dominance in the UK. It’s going to be hard to knock the leader off its perch. 

The US will be tough to crack

That may not be the case in the US, though. It’s hard to imagine that the world’s biggest drinks conglomerate, The Coca-Cola Company (NYSE: KO), is going to accept a new entrant into its domestic market without a challenge. 

Coke is a religion in the US, and The Coca Cola Company has its fingers in every pie (or drink) going. With its distribution network alone, the beverages behemoth will surely outmuscle Fevertree at every opportunity. Given that there are entire vending machines stacked with Coca-Cola drinks, the company has plenty of clout to use to its advantage.

Growth doesn’t last forever

Fevertree has always commanded a lofty price-to-earnings ratio, because it has always deserved it. In the company’s last interim results, earnings grew less than 10%. For a company that trades currently at 40 times earnings, one could argue that this is a company where growth is slowing but the shares have yet to reflect this. 

Even though the stock has halved, I wouldn’t feel comfortable holding at this valuation. In November’s trading update, UK off-trade performance was behind expectations. That’s just not what I expect from a company that is priced to perfection. 

The stock has had a great run delivering value for shareholders, but in my opinion the low-hanging fruit has been picked. There is better value elsewhere. 

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Michael Taylor does not hold a position in Fevertree or The Coca-Cola Company. The Motley Fool UK has 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.

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