Back in December, when Fevertree Drinks’ (LSE: FEVR) share price was 580p, I penned an article speculating about whether 2016 would be another good year for the firm’s investors. Today, the shares stand at around 997p, so I have my answer — yes!
I didn’t invest
At the end of last year, I said: “It would be easy to dismiss Fevertree on grounds of its valuation – the forward price-to-earnings (P/E) ratio sits at about 45 for 2016. That’s high. But I think the firm is worth keeping an eye on because the business model is compelling and growth could have much further to go.”
Well, I kept my eye on it, the valuation didn’t drop back, and the shares went on to outperform. Today, Fevertree trades on a forward price-to-earnings ratio of 48 or so for 2017, and City analysts following the firm expect earnings to rise 11% next year.
If I’d been on board the Fevertree Drinks story I’d be selling some shares now to lock in my gains, because the shares have multi-bagged over two years and the big, early advances in earnings could be over. But how can I find the next Fevertree and how can I justify an investment if a high valuation initially puts me off?
I found that the more I learnt about investing the better I became at keeping some of the stock market’s biggest winners out of my portfolio! Learning about strong balance sheets and attractive valuations made me over-cautious.
Searching for outperformers
Some of my biggest investing winners have been investments that felt a little less safe when I first entered the trade — maybe the valuation was high, or the firm carried high borrowings, or perhaps earnings had yet to catch up with fast-growing revenues. Yet despite such worries, the underlying businesses behind the shares had great potential, a good story, and the shares were probably trending up when I bought them.
I can measure the gains from some of my investments made in this way in the hundreds of percent, so this is a strategy worth pursuing, I reckon. Maybe there’s a small corner of your own portfolio that you could dedicate to trying to capture some of these multi-bagging investments on the London market.
Leading a search for investments with valuation tended to keep me out of some of the best-performing shares, so to pull this strategy off, I think it’s a good idea to switch investment logic on its head by searching with the following priorities:
- momentum
- quality
- value
Normally, I’d use that list backwards, first filtering for a low valuation, then for quality and lastly, if at all, looking for momentum in the share price. However, fast-growing businesses often come to my attention because their shares are going up, so it makes sense to start a hunt for these outperformers with momentum. Back that up with good quality fundamentals and buy as keenly as possible and you could have a winner on your hands.