Why I would buy this hot growth stock over Fevertree Drinks plc

Updated: 
Greggs

Reviewing these two stocks is like watching a game of racing demons. Both have been hurtling along lately, competing to see which can grow faster. So who's streaking ahead now?

Give me fever

The first of these turbo-charged stocks is premium mixer drinks supplier Fevertree Drinks(LSE: FEVR). The company caught the zeitgeist when its founders realised the craft gin revolution demanded a craft tonic revolution too. Its share price is up an astonishing 369% in the past two years, turning the company into a £2.2bn enterprise just three years after floating on the stock market. Talk about fizz.

Now I fear its share price has peaked. After hitting an all-time high of 2,506p in early September, it has trailed to today's 1,911p, a drop of nearly 25%. Something had to give: no company can keep up this pace of growth forever. Also, the stock is now expensive trading at a forward valuation of more than 60 times earnings. That makes it hard for me to call the recent sell-off a buying opportunity.

Branching out

Fevertree should still continue its expansion but at a slower pace. City analysts expect earnings per share (EPS) to grow 45% in 2017 but are downbeat about 2018, when the forecast growth rate falls to 'only' 12%. That would be fine except that the stock is expected to trade at 55 times earnings by then.

I still see Fevertree as the perfect mixer for my favourite gin tipple of Beefeater 24, ice and red grapefruit, but I will not be adding it to my portfolio. However, others reckons that this stock can still make you rich.

On a roll

I was surprised to see how well bakery chain Greggs(LSE: GRG) has performed and with relatively little fanfare: the stock is up 179% over the past five years. The growth story continues with a 15% rise in the last three months, while over the same period Fevertree is down 7.5%. These two are on different trajectories now.

The bakery chain is on a roll, recent Q3 results showed total sales up 8.6% in the 13 weeks to 30 September, against 5.6% one year earlier, with like-for-like sales also accelerating. Its new forecasting and replenishment system is delivering the goods to customers and this year it expects to open up to 150 shops while closing 40-50 poorer performers. It should also refurbish another 130. The firm is not standing still.

The pies have it

Food snobs may sneer but Greggs knows its onion bakes, and its customers, and has shown that it can change in line with shifting tastes by introducing its lighter Balanced Choice range. The rising cost of food ingredients is one headwind, as is the consumer squeeze, but management is keeping an impressively tight grip on every element of the business. This is one stock you might want to buy right now.

The downside is that Greggs now trades at a little pricey 20 times earnings, while EPS are forecast to slow to 2% this year, then pick up a little to 7% in 2018. The forecast yield is a steady 2.5%, covered 1.9 times. Greggs might also find the future a little stickier, but today it looks good to go.

However, we may just have an even more dishy growth prospect for you right here.

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Harvey Jones as no position in any of the shares mentioned. 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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