Stock markets continue to move forward in recovery mode, as investors deal with the aftermath of what was a highly volatile summer trading period. The SPDR 500 Trust ETF (NYSE: SPY) has moved back toward its record highs, however the same has not occurred in the Russel 2000 small-cap stock index:
As we can see, even with the recent recoveries inequities, the small-cap stock index is still trading well off of its long term highs. This is not a total surprise, give that small caps tend to be hit much harder by broad market volatility. However, it means that small-cap stocks still have plenty of room to run higher and this puts our small-cap growth stock portfolio in a very strong position to rally into the final months of 2019.
This Week’s Alert: Freshpet, Inc. (NASDAQ: FRPT)
For this week’s growth stock blueprint alert, we will be looking at a company with major potential for disruption in the growing pet food industry.
Freshpet, Inc. (NASDAQ: FRPT) is a company that markets and manufactures fresh, natural products (including refrigerated treats and meals for cats and dogs. Currently, the company’s consumer base is centered mainly in Canada, the United Kingdom, and the United States. Freshpet sells products under its own branding entity (the Freshpet brand) but also distributed products under the Dog Joy and Dognation label.
These products are distributed through various retail channels, which include grocery stores, mass retail outlets, subscription membership clubs, individual stores with a pet specialty, as well as natural food stores.
Freshpet operates its own website (which also functions as a sales distribution channel), and this tends to be the place Freshpet sees its best margins. The company currently has its headquarters in Secaucus, New Jersey, was incorporated in 2004, and trades with a market cap of $1.75 billion.
Freshpet has quickly become a major disruptor in the booming dog food/cat food market. Sales of the company’s fresh food options (refrigerated) are largely conducted through retail grocery stores, subscription club stores, and specialized pet supply stores. Essentially, the company installs refrigerators in each of these outlet types to make its line of pet food products available to consumer pet owners.
Freshpet derives nearly all its product sales from a broad (and growing) consumer base in North America. Remember, this is a massive market as the retail space in dog food/cat food has quickly grown to reach $30 billion. Even more encouragingly, Freshpet’s sales growth is showing a rate of 6% compounded annually so this shows that we have not yet reached a period of growing maturity for this space in retail.
As of the end of March 2019, the company has already installed refrigerators in over 20,000 facilities (retail stores), and this marks an annualized increase of roughly 10%. At the current rate of expansion, management believes that the company could hit some truly impressive sales numbers in the years ahead. This is not entirely surprising, given the size of the market, its current pace of growth, and the fact that many pet owners are more than willing to spend exorbitant amounts of money on their four-legged loved ones.
As Freshpet continues to grow its consumer base, it looks highly likely that the company will be able to build on its position as an industry disruptor. Freshpet’s growth installment base has been propelled by a renewed focus on its marketing strategy and this has led to some fairly hefty increases in management’s sales projections for the current year.
Current guidance figures show that management expects sales to increase by nearly 25% (and reach $240 million) for the full-year period in 2019. If these sales projections turn out to be true and accurate, this would mark substantial gains of more than 57% from the numbers released in company reports for 2017 ($152 million).
However, this might only be the beginning for this disruptive company. The latest figures show that nearly 90 million American households own pets. Most importantly, consumer surveys show that 95% of those pet owner households view their pets just like they were members of the family.
This means that a huge percentage of American households are likely willing to spend a little extra money in order to keep them healthy and living for an extended period of time. As long as pet owners continue to embrace healthy and nutritional food options for their pets, Freshpet stands to capitalize on a large (and growing) consumer market space.
The most recent surveys also show that there are more than 300 million pets just in the United States alone, which is nearly as many potential customers as the country’s human population. That suggests Freshpet still has plenty of room to expand (and to match management’s aggressive expectations for sales growth in the years ahead).
Company Financials – Freshpet, Inc.
Freshpet’s earnings growth has already shown strong trends in relation to the retail food industry as well as the activity seen in the broader market:
- Analysts expect earnings growth at Freshpet to exceed U.S market averages.
- Analysts expect revenue growth at Freshpet to exceed U.S market averages.
- Current analyst expectations suggest Freshpet’s earnings are likely to grow at significant rates (characterized above 20% yearly).
- These expectations suggest Freshpet is likely to outperform going forward, with annual earnings growth showing the potential to reach 105%.
- Over the past year, Freshpet outperformed earnings growth in the Food industry (which displayed returns of just 5.4%).
- Freshpet’s balance sheet shows the company is capable of meeting its short-term debt commitments using short-term assets and cash holdings.
- Freshpet’s balance sheet shows the company is capable of meeting its long-term debt commitments using short-term assets and cash holdings.
- Freshpet’s debt levels (compared to net worth) are just 24.2%, which is satisfactory when compared to the broader market.
- Five years ago, Freshpet had shareholder equity figures that were negative 5 years ago. This trend to turn positive shows that the company’s management of debt has improved significantly.
Key Chart Technical Analysis – FRPT
In the chart below, we can see that shares of FRPT have been caught in a massive uptrend for an extended period of time:
In this case, we will be looking to build on the stock’s momentum (rather than viewing its activity as a contrarian buying opportunity). Despite the strength of the massive uptrend, recent selling pressure has nearly sent the stock into oversold territory. This gives us an opportunity to buy shares while these are still trading at an attractive valuation.
Remember, the broader market is still showing some weakness in the small-cap space. But if we see further rallies in the S&P 500, it could help small-cap stocks rally sharply. If this occurs, it will likely be too late to buy into shares of FRPT. Evidence that this stock is still trading under the radar can be found in the fact that 95% of its shares are owned by institutions. This means that just 5% of its shares are owned by individual investors. However, insider buying activity has picked up over the last three months and this is another indication that the time is right to start buying FRPT.