Here’s a high growth stock that Terry Smith’s team is buying

Monitoring the trading activity of top fund managers can be a profitable strategy. With that in mind, here’s a look at a stock Terry Smith’s team has just bought.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I’m researching stocks to buy for my portfolio, one thing I always like to keep an eye on is the trading activity of top fund managers such as Terry Smith and Nick Train. I find monitoring the trades of these experts can be a great source of investment ideas.

With that in mind, here’s a look at a stock Smith’s team has recently purchased for his investment trust, Smithson, which is focused on small- and mid-sized growth companies.

Fevertree Drinks

Smithson’s most recent factsheet reveals that in July, portfolio managers Simon Barnard and Will Morgan added Fevertree Drinks (LSE: FEVR). The position was initiated after the company’s share price fell 47% from its 2018 peak, resulting in an attractive valuation relative to the fund managers’ views in relation to the quality of the business and its growth prospects.

While there are no details in regards to Fevertree’s position size within the portfolio, the investment trust only holds 30 stocks, which suggests the fund managers are confident about its prospects. Given this bullish view, should private investors follow Smith’s team and purchase the premium mixer drinks company for their own portfolios? Let’s look at the investment case.

Valuation

While Fevertree’s share price has undoubtedly fallen a long way from its 2018 high, the stock still looks expensive, in my view. Currently, analysts are forecasting earnings per share of 57.5p for the year ending 31 December. At the current share price, that puts the stock on a forward-looking P/E of 40.

On last year’s earnings growth of 36%, that kind of valuation could be justified as the P/E to growth ratio (PEG) equates to just 1.1. Yet given that earnings growth of just 8% is expected this year, I think that multiple looks high, as the forward-looking PEG ratio is 5. Generally speaking, a PEG of around one or less is desirable, so I’m not seeing a lot of value here, relative to the company’s growth.

Broker downgrades

Another reason I’m a little cautious about the stock is that since the company’s interim results in late July – which the market didn’t like at all due to slower growth in the UK – brokers have been downgrading their earnings forecasts and price targets for the stock. For example, after the H1 results, Jefferies cut its price target by 11%, from 2,700p to 2,400p. This could hamper positive share price momentum in the short term.

Economic moat

Finally, another issue that continues to concern me with Fevertree is the group’s competitive advantage. The company certainly has a first-mover advantage when it comes to premium mixer drinks, but does it have a strong economic moat? Is there anything to stop other brands entering the market? I’m not convinced there is. Indeed, every time I go shopping for mixer drinks it seems there are new brands entering the market.

Weighing everything up, I don’t see a compelling investment case for Fevertree at present. Given the high valuation relative to the company’s slowing growth, I think there are better growth stocks to buy right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Smithson Investment Trust. 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.

More on Investing Articles

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »