Why I'd sell Fevertree Drinks plc to buy this monster growth stock
The performance of the Fevertree Drinks(LSE: FEVR) share price has been astounding in the last year. It has risen by 91%, which takes its growth in the last five years to over 1,500%.
During that time the company has been able to generate impressive earnings growth. In the last four years, for example, its earnings growth rate has not slipped below 50% and has been as high as 303%.
While its future prospects may be bright, after such a large rise in its valuation there may be stronger and better value opportunities on offer elsewhere. In fact, here is one stock that could be worth buying in place of the beverages company for the long term.
The company in question is lifestyle fashion brand Ted Baker(LSE: TED). It released positive results in the last week which showed that it continues to make strong progress with its strategy. The company has been able to successfully diversify its brand into new product areas in recent years, and this appears to be aiding its overall performance. It was able to deliver strong growth across all of its regions in 2017, which suggests that its customer loyalty remains exceptionally high.
In the last five years, Ted Baker's earnings growth has always been above 12%. In fact, its annualised rate of growth during that time has been around 18%. Growth of 11%-12% is forecast for the next two years, with the company seemingly having a high chance of delivering on its future guidance. Its diverse business model means that it could perform relatively well in a variety of market conditions.
Despite its track record and bright prospects, Ted Baker trades on a price-to-earnings growth (PEG) ratio of just 1.6. This suggests that it could offer excellent value for money and post a high level of share price growth.
In contrast, Fevertree Drinks appears to be significantly overvalued at the present time. Investors seem to have assumed that the company will continue to grow at the same pace as it has done in the past, which it is not forecast to achieve. For example, its bottom line is due to rise by 9% this year, followed by further growth of 16% next year. And with it trading on a PEG ratio of around 3.7, it seems to offer a very narrow margin of safety - if any at all.
Certainly, the company has a strong position within a number of key growth markets. Its updates show that its reputation as a premium brand remains intact, and customer loyalty is relatively dependable. However, after such a large rise in its share price, it seems to lack investment potential.
Therefore, even though it may have appeal from a business perspective, investors may be better off selling it and buying a stock such as Ted Baker. It seems to be more sensibly priced given its growth outlook.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker plc. 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.