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Is it Time to Freshen Up Your Portfolio With Freshii Inc.?

The Canadian IPO market is finally starting to look interesting with some interesting growth stories such as Freshii Inc. (TSX:FRII) and Aritzia Inc. (TSX:ATZ) making their debuts on the TSX. Warren Buffett isn’t a fan of playing the IPO game because it can be quite difficult to place a valuation on a stock that hasn’t had time to settle in the public market. Although it’s difficult to know what you’re getting yourself into, huge gains can be made by those who can smell opportunity at the early stages.

Freshii is a health-food chain that has soared a whopping 25.5% since its IPO price. The stock now trades at a pricey $14.44, as investors continue to pile into the stock with hopes that the company can follow through with its ambitious growth prospects. There’s no question that Freshii is in the very early stages of growth. If the company can deliver on what it promises, then there is potential for the stock to double or triple in just a few years.

The company plans to triple its store count to 840 by the conclusion of fiscal 2019. Freshii CEO Matthew Corrin stated, “It’s not aggressive growth that we’re managing, it’s aggressive demand. We get over 4,000 franchise applications over the trailing 12 months. What we’re trying to do is be incredibly disciplined on selecting the best partners.”

The company reported 14 straight quarters of same-store sales growth and has been one of the fasting-growing fast-food names on the planet. There’s a huge amount of upward momentum, but the growth plans going forward are extremely ambitious. There’s no room for error if the company is going to meet its growth goals. If anything short of perfection is reported, then we could see the stock fall off a cliff.

As with many IPOs, it’s quite common for the stock to soar in the initial stages before pulling back to more realistic levels as time goes on to give long-term investors a better entry point.

The stock is very expensive right now. The company currently has a market cap of $506.5 million and trades at over 100 times earnings. The management team expects the company to grow by leaps and bounds over the next two years through expansion and same-store sales growth. If the huge upward momentum carries forward, then we could see Freshii soar into the atmosphere over a relatively short period of time.

If you believe the company can expand its store count to 840 while maintaining same-store sales growth between 3-4% by the end of fiscal 2019, then Freshii may end up being a huge winner.

Healthy eating is on an upward trend, and it doesn’t seem like this is going to change anytime soon. I believe this will propel the stock higher over the long term. But the stock is just too risky to consider at such a high valuation, especially after soaring over 25% in a few trading sessions. I would wait for a short-term pullback to a more reasonable level below the IPO price of $11.50 before buying shares.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned.

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