Freshpet (FRPT) trades for $48 and change. Plenty of stock pickers have soured on Freshpet in recent months for varying reasons. However, there is some merit to thinking like a contrarian when investing your money as replicating the investing decisions of others rarely works unless you get the timing just right.
Let’s take a look at whether it makes sense to invest like a contrarian in the case of Freshpet.
Freshpet is Poised for Growth
Savvy investors understand there is big money in the pet business. Freshpet refrigerators loaded with fresh cat and dog food are positioned in supermarkets and pet stores across the United States and beyond. Part of the company’s success can be attributed to the fact that pet ownership is increasing as time progresses. People eagerly spend copious amounts of money on their furry friends. The question is how many of those dollars will be spent on Freshpet offerings.
Take a look at Freshpet’s growth metrics, and you will walk away thinking this company’s stock is poised to take off. Freshpet has shown double-digit top-line growth ever since its IPO hit the market. It was merely five years ago when Freshpet went public at a mere $15 per share. Today, the stock is traded at nearly $50 per share. The company’s revenue has accelerated for three straight years. However, reported losses are becoming more common while margins are contracting. If the economy enters a recession, fewer pet owners will be willing to spend their hard-earned money on slow-cooked food for their furry friends even if it is presented in an aesthetically-pleasing Freshpet branded refrigerator at the local grocery or pet store.
Freshpet’s August Decline
Those interested in investing in Freshpet are justified in questioning whether the company’s August decline is cause for concern. Though the stock has rebounded since the late summer dip, the sell-off is worthy of in-depth analysis. The decrease in Freshpet’s stock price is attributable to an unexpectedly large loss in the second quarter. Though top-line results came in better than expected for the quarter, some investors jumped ship as the company’s adjusted gross margin decreased from 51.4% to 48.5%. This decline is an indication Freshpet is unable to convert its sales hike into actual profit. According to Freshpet executives, the slim margins are the result of a hike in processing and production costs as well as costlier ingredients and increasing freight costs.
It is also worth noting Freshpet ramped up its marketing budget in an effort to boost growth across posterity. This increase in advertising spending took a considerable chunk out of the company’s quarterly profits. However, the silver lining is the fact that the company’s sales increased more than 26% in the quarter to surpass the $60 million threshold, well in excess of the anticipated $59.6 million. All in all, Freshpet reported a 16 cent loss per share which is significantly worse than the 10 cent loss per share from merely one year ago. Making matters worse is the fact that Wall Street analysts expected Freshpet to lose a mere 7 cents per share.
Freshpet Investors Have Reason for Hope
Freshpet executives hiked full-year guidance, signaling that the company anticipates a rosy future in the near-term. The company’s revised annual revenue estimates exceeded $244 million, which equates to a 26% growth rate. Freshpet even hiked its full-year EBITDA guidance by about 3% to $29 million.
Are ’19 Freshpet Investors Late to the Party?
Some investors question whether it is prudent to invest in Freshpet at the current price as the stock has increased more than threefold across a mere three years. However, Freshpet is not the optimal stock for those looking to make money in the short-term. This is more of a long-term growth stock that has the potential to provide stellar returns in the years and decades to come. The bottom line is Freshpet has solid top-line growth that partially offsets the company’s disappointing bottom line as of 2019. It is certainly possible Freshpet will disrupt the pet food industry to the point that it becomes a takeover candidate. As experienced investors know, even one supposedly legitimate rumor about a potential takeover has the potential to send the stock of the company-to-be-acquired to unseen heights. Buy and hold for the long haul.