Earlier this month, it was revealed that Coinbase Global (US:COIN) had received a favourable ruling from the US Supreme Court backing its request to halt lawsuits brought by some of its clients while it attempts to move the disputes out of courts and into private arbitration. The decision would have been welcomed by bosses at the crypto platform, particularly as they had been in a parallel squabble with the US Securities and Exchange Commission.
If the roll-out and the ensuing clamour for cryptocurrencies has shown us anything, it’s that many people are willing to risk hefty sums of money on areas of the market about which they know next to nothing.
This realisation hit home recently when I was poring over an old copy of Jim Slater’s investment guide – The Zulu Principle. The many readers of the Investors’ Chronicle who are familiar with Slater’s most lauded investment guide will know that he repeatedly highlighted the importance of concentrating their efforts on specific areas of expertise to exploit trading opportunities.
It is a lesson that would not be lost on venture capitalists, nor investors who pursue contrarian strategies. Put simply, it enables you to identify oversold areas of the market that have been missed by other retail investors – this may entail going against conventional wisdom. Arguably, it’s the clearest route to alpha returns and worth keeping in mind as FTSE 250 shares extend their longest losing streak since the dark days of the pandemic. The gloomy outlook on the UK economy is understandable as it now seems probable that the Bank of England will keep on raising interest rates until consumer prices moderate, even if this runs the risk of pushing the economy into recession.
The trajectory of interest rates is doubly important given the percentage of mortgagees that are about to tip into variable rate arrangements. But the point is that more contrarian opportunities arise when markets and economies are on a bumpy road – and, somewhat perversely – this can be favourable for retail investors.
One stock that may be due for a reassessment is Fevertree Drinks (FEVR). Last time we covered the premium mixer producer we complained that its then “forward rating of 57 times consensus earnings still reads more like a tech stock”. Unfortunately, we may have underestimated its near-term growth prospects.
In its latest AGM trading update, the company revealed that it had recorded its highest ever share (by value) in the UK on-trade during the first quarter, along with further volume growth in the US and an increased share of the premium mixer category in Europe. If the company is to be classified as a contrarian play, it's worth considering whether drinkers would be inclined to trade down even if household budgets are under pressure, especially given that alcohol is generally price-inelastic.
There may be a slightly more prosaic reason to reconsider the investment case. The overriding challenge facing Fevertree over the past 20 months or so relates to rising input costs for glass production. But according to recent analysis from HSBC (HSBA), those bottling prices could be reversing. The impact on net returns could be profound.
Early on in its life as a publicly listed company, Fevertree's growth rates were hard to fathom, at least until the realisation seeped in that it was selling into a seemingly entrenched consumer market that was, instead, evolving rapidly. If punters were prepared to fork out more cash for premium spirits, why wouldn’t they follow suit with mixers? That realisation, combined with the company’s asset-light business model, precipitated a colossal 2,240 per cent increase in the share price in the four years through to September 2018.
We caught a fair chunk of that early appreciation, but with the shares now trading at 1,200p apiece, is now the time to rebuild exposure? Projected costs are clearly central to that deliberation. HSBC takes the view that most of the extra costs suffered in 2021-22 should unwind rapidly in the second half of this year, while the moderation in European energy prices probably means that the £20mn in extra glass costs budgeted at the start of the year “may indeed prove too pessimistic”.
The bank estimates that the company's return on equity will rise from 9.6 per cent to 17.4 per cent through to the end of 2024, while its enterprise/cash profits multiple will nearly halve over the same period. A projected 2025 multiple of 17.4 may still appear a little punchy, but it should be seen in the context of its growth and recovery prospects – particularly in the US – and the anticipated contraction of core costs. Perhaps the question is whether retail investors will be as willing as Fevertree’s customer base to pay a premium for a quality product?
