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.

Bargain territory

The shares are in deep bargain territory. Year to date the share price has dipped by almost 70% to just below £9.

Though the broader market hasn’t fared too well in 2022 either, the fall in the share price of Fevertree is one of the steepest falls I’ve seen this year.

Some city analysts feel the intrinsic value for the stock is closer to £15, so the attraction to buy now is certainly strong for me. Particularly as the shares are trading at such a steep discount to the firm’s book value.

That said, the attraction is somewhat lessened by the stock also being in the list of the top 10 most shorted FTSE 100 shares.

Any growth left in the share price?

Fevertree is a cyclical stock and its share price can be quite volatile. This can be a positive point in the long term. It suggests the share price can outperform the market in good times. The flipside for me is that the stock will also underperform the market when times are tougher.

Economic conditions aren’t the greatest right now and don’t look like improving soon. So, this volatility poses some downside risk to my portfolio.

The advantage with fast-growing companies (which has previously included (Fevertree) is that over time their profit margins increase. But the company’s margins have been decreasing.

Moreover, its earnings are expected to fall 12% this full financial year, which doesn’t help build up its investment appeal for me. It appears that the risk of future uncertainty is high, at least in the near term.

A challenging growth outlook

Fevertree has long attracted investors for its growth potential. My perspective of the stock being in bargain territory would usually be a signal for me to snap up some shares.

But its earnings growth over the last couple of years hasn’t been the greatest.

My take is that the company hit its height during the pandemic, when ‘lockdown cocktail hour’ spurred sales. People were happy to splash some of their disposable cash on this activity. Most consumers have less disposable cash now.

I expect to see this lifestyle change, along with inflation, to be reflected in its interim results update tomorrow.

Do I think Fevertree shares are currently undervalued? Yes. But the prospect of negative growth brings about some degree of risk to my portfolio. It’s a risk I’m not willing to take on a stock I believe may have plateaued in its growth story.

Today, I’m revealing three examples occupying spots on my buy list.

Games Workshop

I already own stock in fantasy figure maker Games Workshop (LSE: GAW) and I’m looking to add more.

Like most listed companies, the owner of the Warhammer 40,000 brand is having a nasty 2022. Shares are down almost 30% year-to-date as stock markets fret over, well, pretty much everything.

I don’t see this situation changing immediately. Like other retailers, Games could suffer as its legion of fanatical followers understandably prioritise paying their bills. For this reason, the next update we receive from the FTSE 250 member could make for tough reading.

For someone with a longer timeline however, I think a price-to-earnings (P/E) ratio of a little under 19 is already great value, relative to the quality of the underlying business. Attractions here include big margins, a seriously-strong balance sheet, a dominant position in a niche market and plenty of scope to push its valuable IP in new directions.

XP Power

Next on my buy list is power solutions provider XP Power (LSE: XPP). It’s another firm that’s been heavily rejected in 2022 with shares tumbling nearly 65%. Again, I wonder if the market has become overly pessimistic here.

Now don’t get me wrong, things are pretty grim at XP Power. Revenue growth has been held back by component shortages and a resurgence of Covid-19 in China. A rapidly rising debt pile is not something I like to see either.

Once again however, I suspect this is already reflected in the price. A P/E of 10 could prove wonderful value when the good times return. And given just how important the company’s products are, I think the chances of this happening are pretty high. It already had a record order book of £285m going into the second half of 2022.

In the meantime, there’s a 5.2% dividend yield for me to re-invest back into the market (and, potentially, the very company this cash originated from).

Fevertree Drinks

A third growth stock I’m looking to invest in is premium tonic water purveyor Fevertree Drinks (LSE: FEVR). Shares have crashed almost 70% in 2022 through a toxic mix of increasing costs, labour shortages across the pond and less glass being available.

Are any of these headwinds permanent? I don’t think so. And that’s where my Foolish instincts kick in. Ignoring the share price movement, I reckon this remains a great company with a strong premium brand that’s quickly developing a following in the US.

But there’s a problem. Fevertree shares change hands at a P/E of 40. At face value, that’s (very) punchy considering margins have been squeezed hard in recent years. And as purse strings tighten, a bad 2022 could easily turn into an equally tricky 2023.

On the flip side, Fevertree boasts strong finances to weather the storm. And when energy prices do calm down and discretionary income bounces back, I can see drinkers pushing the boat out once again.

Will I buy before then? I just might!

Darktrace said it was in discussions with technology investment company Thoma Bravo regarding a cash offer. Talks are currently in a preliminary stage and Thoma Bravo has until 12 September to confirm its intention.

Following the Darktrace share price

Shares of British fashion brand Ted Baker also soared by 17% after a cash offer by Authentic Brands. The Forever 21 owner agreed to buy Ted Baker for 110p per share, in a deal worth around £211m.

With the pound trading near an all-time-low against the dollar, UK shares could look particularly attractive to larger US firms or private equity investors.

That got me thinking. Which British shares could be targeted next?

Top British shares

I’d look for companies that own strong brands that could fit nicely within much larger global competitors. For instance, I reckon Fevertree Drinks (LSE:FEVR) might look attractive to a drinks giant like Coca Cola or Pepsico.

Fevertree is a market leader in the premium tonics category. It operates an asset-light model that allows it to generate a double-digit return on capital employed. That’s a key measure of business quality, in my opinion.

It experienced phenomenal growth since being founded in 2005. It benefited by being a first-mover in this segment and quickly expanding its distribution network across dozens of countries.

That said, it has attracted competition over the years. So it remains to be seen if Fevertree can maintain its high profit margins and market share.

Overall though, it’s a cash-rich business with no debt. Its share price has also tumbled by 54% over the past year. I reckon it would make an attractive bid target. But even if a deal doesn’t happen, I’d still buy these shares for its brand value and quality characteristics.

Cash in the sofas

Next, I reckon furniture and flooring business SCS (LSE:SCS) is ripe for a takeover. With a market capitalisation of just £55m, it’s tiny. But it has a lot going for it, in my opinion.

It’s one of the most cash-rich companies that I’ve come across and has more cash than its market cap. That could be a highly attractive factor for a potential buyer.

Regardless of any possible attractor, I’d buy this share for its 9% dividend yield alone. Its share price has already fallen by 46% over the past year and I reckon it has priced in a significant slowdown in customer activity. It now trades at prices last seen at the height of the pandemic.

Many smaller competitors might struggle to survive in this sector as the rising cost of living impacts spending on big-ticket items like sofas. Bear in mind that in the short term, this could affect SCS too but the strength of its balance sheet suggests that it should survive. Overall, I reckon it would make a solid long-term holding for my Stocks and Shares ISA. But hopefully one day, a potential suitor will come along and SCS will soar like the Darktrace share price.

AIM stocks: not for the faint-hearted

Well, it’s probably best to start on a cautionary note.

AIM (the Alternative Investment Market) has a reputation for being the ‘Wild West’ of UK investing. And up to a point, this is justified. Thanks to more relaxed regulations, it’s attracted its fair share of questionable businesses — most notably from the oil, mining and biotech spaces — over the years. Even many of those that were run appropriately failed to deliver the returns investors thought they would.

AIM stocks also tend to be fairly young companies that list with the intention of raising cash to fund growth. While there’s nothing wrong with this, it does mean that investors might have more limited information and data from which to make a decision to buy stock.

Having stated the above, I do believe that the junior market has come on in leaps and bounds over the years. Moreover, there are most definitely a few diamonds in the rough.

Great stocks

I think Fevertree is a good example of a quality AIM stock, albeit one that’s lost its fizz. Down almost two-thirds in value in 2022 alone, the former market darling has been struggling with supply chain problems and rising glass costs. Profit forecasts have been drastically cut.

Fast-fashion purveyor boohoo is another company whose valuation has tumbled. Like Fevertree, online clothing retailers have seen their slim margins reduced. The higher cost of living has impacted discretionary income and returns have soared. The Manchester-based business also continues to attract the wrong sort of headlines over its ESG (Environmental, Social and Governance) credentials.

But I still think there’s a lot to like here. Both Fevertree and boohoo have sufficiently solid financial positions, marketing savvy and a lot of room to grow. Perhaps most interestingly, management at the former has been dipping their hands in their pockets and buying up stock. If that doesn’t suggest that they’re confident of a recovery, I don’t know what does.

A word of warning

Of course, I could be utterly, hopelessly wrong. The tough times could continue for some time, greatly impacting the ability of these AIM stocks to bounce back to form. Both face strong competition, neither are cheap to buy and only one (Fevertree) pays a dividend. All this could keep more cautious investors away.

As someone already invested in one of these companies, a slow recovery, if it comes at all, would hinder my pursuit of financial independence. However, it would hurt a lot more if I didn’t hold a diversified portfolio.

Thankfully, I do.

Good but not perfect

AIM stocks have the potential to rapidly change my wealth and, consequently, my life. So yes, I do think now might be a good — albeit not necessarily perfect — time to go hunting in this part of the UK market.

Even so, it’s still vital for me to invest according to my personal risk tolerance. Therefore, I’ll be confining my wishlist to only those that are already generating profits.

Is this an opportunity to pick up the stock at a good price? Let’s take a look.

Why Fevertree shares crashed

It’s not hard to see why Fevertree shares tanked last week. In the company’s half-year pre-close trading update, it advised that it now expects full-year operating profit to be in the range of £37.5m to £45m. Previously, it had provided an estimate of between £63m and £66m. That’s a significant downgrade to guidance. Last year, operating profit was £55.6m.

As for why profitability has declined, the company blamed labour shortages, logistical issues, and higher glass costs. It noted that in the last few months, it had seen “rapid shifts” in the operational and cost backdrop.

However, encouragingly, management stressed that demand for its products remains strong and that the long-term outlook remains attractive.

“The strong and growing consumer demand for the brand, our exciting pipeline of innovation, and the growing interest in long-mixed drinks, gives us more confidence than ever in the long-term opportunity,” commented Co-Founder and CEO Tim Warrillow.

And what stands out here is that management puts its money where its mouth is. Since the update, four insiders have bought Fevertree shares. I’ve listed the insiders who bought stock below:

• Co-Founder and CEO Tim Warrillow (115,000 shares at £8.71 per share)
• Chairman Bill Ronald (11,416 shares at £8.72 per share)
• Board member Jeff Popkin (15,208 shares at $10.45 per share via the US OTC market)
• Board member Kevin Havelock (30,816 shares at £8.90 per share)

Insiders only buy stock for one reason – to make money. So, this buying indicates that those within the company expect the Fevertree share price to rebound.

Should I buy the stock now?

As for whether I’d buy the shares for my own portfolio, I’m not convinced the risk/reward proposition is attractive at current levels.

Analysts expect Fevertree to generate earnings per shares of 28.9p for this year (note that this forecast has come down by 10.4p in the last month and could come down more). That puts the stock on a forward-looking price-to-earnings (P/E) ratio of about 38. That seems quite high to me. I don’t think that valuation offers a margin of safety. If growth challenges persist, the share price could fall further.

It’s not just the valuation that concerns me here though. Another issue I have is in relation to the competitive advantage. I’ve never really been convinced about the brand power here. To my mind, premium mixer drinks are fairly substitutable. When I’m drinking spirits, I genuinely don’t care if they’re mixed with mixers from the company or from Schweppes, Fentimans, Double Dutch, or any other premium brand. Ultimately, it’s the alcohol brand I care about, and not the mixer one. This leads me to believe that profit margins could be eroded in the future if new competitors appear.

Given the high valuation and my doubts on the brand power, I’m going to leave Fevertree shares on my watchlist for now. All things considered, I think there are safer growth stocks to buy for my portfolio today.

This slump has left Fevertree shares trading at levels last seen when markets crashed at the start of the pandemic. I’m wondering if this could be a great opportunity for me to add a quality growth brand to my stock portfolio.

What’s gone wrong?

Before I decide whether to buy Fevertree shares, I want to understand what’s gone wrong.

Fevertree says that its global sales rose by 14% to £161m during the first six months of 2022. Sales forecasts for the remainder of the year are unchanged.

However, the company has identified three problems that have caused profits to slump.

Labour shortages on the US East Coast meant that the company had to ship extra stock from the UK, rather than manufacturing it in the US. Port delays and rising shipping costs meant that profits were down, and the US market ran short of some products.

More broadly, rising costs are said to be affecting the whole business. According to management, rising transport costs and increases to the cost of bottle glass are particular problems.

As a result of these headwinds, management now expect to report an underlying cash profit of £37.5m-£45m this year. That’s about 35% below the previous forecast of £63m-£66m, in March.

Should I be worried?

I can live with a one-off profit warning due to external factors. What worries me is the risk that this former high flyer may now be losing some of its edge.

Increased raw material costs and higher shipping rates have been well-known problems since last year. However, Fevertree doesn’t seem to have been able to push through price increases to protect its profits.

Unfortunately, falling profit margins are not a new problem for Fevertree shareholders. The group’s operating profit margin peaked in 2016 at 33.6%. It’s fallen every year since then, hitting 18% in 2021.

My sums suggest the company could report an operating margin of around 12% this year. That’s similar to Britvic but lower than Irn-Bru maker AG Barr. Both of these firms sell mass-market brands, without the premium appeal of Fevertree.

All of this leave me wondering if Fevertree is struggling to maintain its pricing power as it continues to expand.

Are Fevertree shares cheap enough to buy?

Based on today’s update, my sums suggest that Fevertree could report earnings of around 25p per share this year. That would put the stock on around 35 times forecast earnings, based on a share price of 850p.

That’s not cheap by conventional standards, but I think it might be worth paying if Fevertree can overcome this year’s problems and rebuild its profit margins.

On balance, I still have a good impression of this business, but I’m not yet convinced that the shares are a bargain buy. I’m a bit worried that we may not have seen the end of Fevertree’s current problems.

For this reason, I’ve decided to wait for the group’s half-year results in September before I decide whether to invest.

With that in mind, here are two growth stocks currently trading at 52-week lows that I would buy for my portfolio today. 

Growth stocks with further potential

The first company is the online stockbroker Hargreaves Lansdown (LSE: HL). This corporation has revolutionised the online trading market in the UK over the past couple of decades. As consumers have flocked to its low-cost offering, profits have jumped from £177m in 2016 to nearly £300m for 2021. 

Unfortunately, the company has warned that growth could slow in the years ahead. According to management, increasing competition in the market and less volatility (meaning investors do not have as many opportunities to trade) could hit overall profitability. 

Based on these challenges, the market has been selling the stock recently. However, I think this presents an opportunity to acquire a market leader at a discounted price. The stock is currently trading at a forward price-to-earnings (P/E) ratio of 24, below the group’s five-year average of around 30.

I think this multiple undervalues the company and its potential, which is why I would be happy to buy this growth stock for my portfolio today. 

International expansion

I would also buy premium mixer brand Fevertree (LSE: FEVR) for my portfolio of growth stocks.

The stock is currently trading just above its 52-week low, which presents an attractive opportunity. Indeed, the company is still growing, although it is just not growing as fast as the market believes it should. 

After a rocky 2020, when earnings per share declined 30%, the corporation has been struggling to rebuild its international presence. Nevertheless, with total sales of just £310m, I think the enterprise has tremendous potential. It represents a tiny fraction of the global beverage market, leaving plenty of room for growth in the years ahead. 

Challenges the company could face in the next few years include inflationary pressures. These could hit profit margins and hold back growth. Consumers may also trade away from the brand seeking lower-cost alternatives. 

Despite these headwinds, I think the stock looks attractive as an investment for the next couple of decades at current levels. It has a cash-rich, debt-free balance sheet to support its growth ambitions, and there is plenty of scope for the group to expand into new markets. There has also been a recent notable trend of consumers upgrading to premium drinks and spirits. The company could benefit from this tailwind over the next few years. 

After recent declines, it looks to me as if the market does not appreciate Fevertree’s strong brand and expansion potential. 

With this in mind, here are three quality companies now trading near 52-week lows.

Fevertree Drinks

Late in January, one-time market darling Fevertree Drinks (LSE: FEVR) announced that cost headwinds would be more significant than expected, meaning that margins at the mixer specialist are likely to “remain broadly flat in 2022“.

This announcement succeeded in taking away most of the gains made in the second half of 2021. Fevertree’s share price now stands close to its 52-week low. So is now the time to buy the stock?

Well, a valuation of almost 49 times forecast earnings suggests not. Anything this high implies/demands a company should deliver perfectly on its strategy. That’s not easy considering the ‘interesting’ economic outlook right now.

Then again, this is not a stock that’s ever likely to trade at a bargain price. Prior to the pandemic, returns on capital — a key metric for star fund manager Terry Smith — were seriously good. Fevertree’s finances also look solid with hardly any debt on the balance sheet. There’s lots of ‘white space’ left for the company to grow into and it already possesses a great brand. 

I think there’s a good chance of this company recovering strongly, in time. For now however, it stays on my watchlist.

Softcat

IT solutions provider Softcat (LSE: SCT) is next up. The FTSE 250 member’s share price is also getting close to its 52-week low (1,419p, set last April). Considering its stellar track record, this selling pressure grabs my attention.

Like Fevertree, Softcat has a history of generating seriously good returns on the money it invests in the business. It’s clearly benefited hugely from the increased demand for support from clients over the pandemic too. 

That’s not to say Softcat is without risk. Margins, while decent for its industry, are average relative to the rest of the market. The stock also trades on a P/E of 33. That’s pricey, considering that earnings aren’t expected to grow much at all this year. 

Given that the stock could fall further if the rotation into value stocks continues in 2022, Softcat only makes it to my watchlist, for now. 

Games Workshop

A final growth share that’s let off steam has been the fantasy figurine-maker Games Workshop (LSE: GAW). The shares are now down over 20% year-to-date and only slightly above the 52-week low. Product release delays and increasing costs are partly to blame.

Of the three mentioned here, this is the stock I’d be most likely to buy today. While fixating on valuation is never a good idea, a forward P/E of 22 looks very reasonable, considering its dominance of this niche market. Again, its finances are robust compared to many other companies.

Yes, there’s a risk the share price could dip lower if margins continue to be squeezed. As such, it may pay for me to buy in tranches if I end up pulling the trigger.

There was a time when Games Workshop was knocking on the door of the FTSE 100. Assuming it is able to successfully push its Warhammer franchise over the next few years via games and films, I’m confident this could still happen. 

What the trading update says

To do that, the first essential step, of course, is to figure out why on earth it has dropped so dramatically. It turns out that much of the fall was seen yesterday when it released its trading update. The stock fell a whole 8.5%! What has happened here? In one word, inflation. That is what happened. The company says, “cost headwinds in 2022 will be more significant than we anticipated”. As a result, “margins are expected to remain broadly flat in 2022”. 

Implications for the Fever-Tree Drinks stock

The stock already has a pretty big price-to-earnings (P/E) ratio of 62 times. This explains why the stock was falling even earlier. Over the past year too, it is down by 13.5%. If its profits will underwhelm in the next year, such a high market valuation would be even harder to justify in my opinion. So, clearly there is a case for its share price to decline. 

That said, the stock is far from being a bad one. On the contrary, it is a financially healthy company. For the year ending 31 December 2021, Fever-Tree Drinks saw revenue growth of a robust 23% compared to the year before. This growth was dragged down a bit by a 15% increase in its biggest market, which is the UK. Its other significant markets of US and Europe both showed 30%+ growth. 

What could go right

It also expects to see a revenue rise of up to 17% this year. I think this ties in with the fact that the pandemic is quite likely expected to moderate even further during 2022. And this would mean that we would go out more to public places without fear, which is likely to increase sales of alcohol and mixer drinks like Fever-Tree products. Moreover, since the economy is also recovering, this is even more likely to be the case. During phases of high economic growth, consumption spending rises and vice versa. In any case, I think its long-term prospects look good.

As far as inflation goes, it is clear that efforts are in place to bring it under control. High government spending required during the pandemic will soon be a thing of the past it appears. And central banks are increasing interest rates too. Just two days ago, the US Federal Reserve said that it will start tightening rates soon. The Bank of England probably has a few interest rate increases pencilled in for the year too. My point is, that it might just be a matter of time before inflation starts coming off. And that could mean easing cost pressures for the company. 

I am looking forward to further developments on this aspect and how they impact the stock. For now though, I have moved this AIM stock up to the top of my watchlist.