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Norris shorts Fever-Tree, says shares could halve

Fund manager Barry Norris bets against mixer drinks maker whose shares have risen more than 16-fold in less than four years.

 
Norris shorts Fever-Tree, says shares could halve
 

Barry Norris, manager of the Argonaut Absolute Return fund that has enjoyed a revival in fortunes over the last year, is betting against Fever-Tree (FEVR), the stock market darling whose shares have risen more than 16-fold in less than four years.

Norris has taken out a 'short' position on shares in the mixer drinks maker, saying the stock could fall by 'at least' 50% if his prediction of a dramatic slowdown in sales growth is borne out.

He has pitted himself against a host of top-performing rival fund managers who owe a large chunk of their returns to the huge rally in the stock.

Independent (IIT ), the top-performing UK-focused investment trust of the last five years, whose shares have rallied 233.5% over that period, has a 10.4% position in Fever-Tree, according to the latest portfolio data, published at the end of January.

Old Mutual UK Smaller Companies Focus , the best-performing open-ended UK smaller companies fund of the last five years, has a 5% position according to February's factsheet, which has helped towards a 176% return.

Shares in Fever-Tree have risen by more than 1,500% since floating at 165p in November 2014. Today the shares were changing hands at £26.85, down from a peak of £29 in March.

'The growth rate has to slow down'

Norris (pictured), who owned the shares two years ago, has now turned against the stock, arguing the shares' valuation left no room for error, just as the company's heady growth in UK sales was likely to slow down.

'When you start on a valuation of 18 times sales, a 60 times price-earnings ratio, that leaves no room for execution error,' he said. 'There's a lot of growth already factored into the valuation.'

In an update to investors in his fund, Norris said UK sales growth, which the company estimated at 96% for 2017 in a January trading update, was likely to slow down.

'My basic contention on this stock is the growth rate simply through the law of large numbers, has to slow down and that the company will struggle to grow into its multiples,' he said.

He said Fever-Tree's UK  sales were particularly vulnerable as a result of the company's move towards supplying its products to supermarkets and a workforce which was incentivised towards sales rather than profits. This risked damaging the brand and leaving existing customers over-supplied, Norris argued.

'A couple of years ago you could only really buy it in high-end bars and restaurants and it was very good in terms of protecting its brand,' he said.

'But if you can buy it discounted in Sainsbury's the brand value of the company is not going to sustain itself in a way it would have done if it was more exclusive.

'When brands meet the shopping mall they often die and I think that's going to happen with Fever-Tree.'

Norris claimed the level of sales growth delivered by Fever-Tree to date meant the company was risking oversupplying the market, meaning future growth was likely to tumble.

'If we look at the sales force with Fever-Tree and the management, they are all highly incentivised on sales rather than profitability.

'So the chances they have stuffed the channels in the UK with as much Fever-Tree product as they possibly can and that their customers are overstocked with Fever-Tree products I think is quite high,' he said.

'Clearly the company in the UK is not going to grow 96% in 2018. The question is what is that number and is there a chance that the number not only slows down to very low growth but potentially turns negative on the back of overstock of their products?

'Certainly if that happens the share price is going to be down at least 50% if not more.'

Dignity short helps turnaround

Norris has enjoyed a welcome winning streak from his fund's 'short' positions in recent months, delivering 1.9% to the fund's performance in the first quarter of 2018, a choppy time for markets.

That has helped him turn around performance of the fund, which is up 28% over the last 12 months, a return bettered by only 11 other UK-based funds of the more than 2,700 available to investors.

In the 18 months that preceded that, Norris had had lost 27%, the worst return of any UK-based fund over that period, stung badly by the Brexit vote, which left the fund down nearly 9% in June 2016 alone.

'Brexit has changed everything and out failure to anticipate it cost the fund a significant monthly drawdown,' Norris said at the time.

Among the short positions to have boosted performance so far this year was a now-closed bet against Wereldhave (WEHA.AS), the Dutch real estate company whose shares are down 17% in 2018.

Norris also profited from the halving of Dignity (DTY) shares in January as the funeral services provider issued a profit warning and cut pricing amid stronger competition.

He closed the bulk of the position after that fall, removing the remaining short in March when the company reported a jump in profits. 

'Although we think the company certainly has some short term challenges and a highly indebted balance sheet, that was certainly a good return and reflected the challenges the company faces.

3 comments so far. Why not have your say?

Peter Rigg

Apr 20, 2018 at 17:44

Fever Tree sp is surely driven by the AIM Funds set up with Inheritance Tax avoidance in mind?There are a limited number of qualifying companies for them to invest in.

report this

Jeffrey Hurst

Apr 21, 2018 at 12:31

I took my (huge) profit a while back, but have held on to a modest holding which I'll sell soon if their price drops much more.

report this

ROGER HULME

Apr 23, 2018 at 09:58

James Halstead who are based in Radcliffe near Manchester are an AIM company worth investing in. They seem to be below the radar of most Fund Managers who seem unaware of many firms in the provinces.

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