Fevertree (LSE:FEVR) shares have experienced a major collapse in 2022. Year to date, shares in the premium mixer drinks business are down about 65%.
Is this a great buying opportunity for me? Or are there better growth stocks to buy for my portfolio today? Let’s discuss.
Two reasons to be bullish on Fevertree
I can see a few reasons to be bullish on Fevertree shares today. For a start, the company continues to generate solid top-line growth. For the six months to the end of June, for example, revenue came in at £160.9m, up 14% year on year (growth in Europe was up an impressive 27% year on year).
And management remains confident about the growth story going forward. “The long-term opportunity for the business remains very significant,” said CEO Tim Warrilow in the company’s H1 results. “As the global leader of the premium mixer category we remain at the center of the well-established trends to premiumisation and long-mixed drinks,” he added.
Secondly, several company insiders have purchased stock recently. Regulatory filings show that in late September and early October, board members Jeff Popkin and Kevin Havelock invested around £680,000 in Fevertree shares. Popkin and Havelock each have over 25 years experience in the beverage industry. The former is currently North American CEO of Mast-Jägermeister, while the latter is currently global president, Refreshment at Unilever. So these insiders are likely to have a good understanding of Fevertree’s prospects. I see their buying activity as a positive development.
The shares aren’t cheap
Having said that, Fevertree shares are still quite expensive, even after their recent decline. This is due to the fact that the company’s profits have been squeezed by industry-wide inflationary pressures.
Currently, City analysts expect Fevertree to generate earnings per share of 21.5p for this year and 25.9p for next year. This means that at the current share price of 929p, the forward-looking price-to-earnings (P/E) ratio here is 43, falling to 36 using next year’s earnings forecast. These multiples seem quite high to me. I think buying the stock at these valuations is quite risky. If growth stalls, or earnings come in below expectations, the stock could head lower.
It’s worth noting here that Financial Conduct Authority data shows that the stock has quite a high level of short interest (6.5%) right now. This indicates that hedge funds and other sophisticated investors are betting that Fevertree’s share price will fall. I generally avoid buying stocks that are heavily shorted as research shows that these stocks tend to underperform.
My move now
Given the high valuation and the level of short interest here, I’m going to leave Fevertree shares on my watchlist for now. For me, the risk/reward proposition is not so attractive. All things considered, I think there are better growth stocks to buy for my portfolio today.