5 Alcohol Stocks Hedge Funds Are Getting Drunk On
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After identifying the most popular stocks among hedge funds (see our entire Top 10 list here) according to their third quarter 13F filings, we have decided to break down the top five alcoholic beverage companies that hedge funds love. Many of these beverage companies should see a boost from a rise in expected employment that should in turn aid spending on alcoholic beverages. We also like the alcoholic beverage industry given its stability regardless of the economic backdrop. Our list includes 400 hedge funds and prominent investors that are required by the SEC to disclose their public equity holdings quarterly. In descending order, we have outlined the most-loved alcoholic beverage stocks based on the aggregate number of funds owning each.
Diageo (NYSE: DEO) had 19 filers owning the stock, putting it in fifth. Diageo has one of the leading premium alcoholic beverages portfolios with brands that include Smirnoff, Johnnie Walker, Guinness, Baileys and J&B—all in all 14 brands. Diageo trades in line with other premium liquor companies at 24x earnings, but has been penetrating the U.S. market better than others. Diageo now receives over 30% of its revenues from North America and the beverage company expects to see 2013 organic sales of 6% thanks in part to restructuring and focusing more on premium brands. While Diageo trades in line with peers on a trailing basis, its forward P/E of 17x may provide investors with a value play.
Molson Coors Brewing Company (NYSE: TAP) was fourth with a total of 23 filers at the end of 3Q. Being the fifth largest brewer in the world, Molson expects to see lagging growth in 2013 as wine and spirits take market share from beers. Despite the lackluster growth prospects, with its diversified product mix—with such products as Coors, Miller and Blue Moon—the argument could be made Molson is a value play. Trading at the cheapest P/E amongst its peers at only 14x earnings, investors might be over discounting the brewer’s growth prospects, including its acquisition of European brewer Starbev.
Beam (NYSE: BEAM) saw a net increase of 5 filers and called 26 filers owners to be the third most popular alcoholic beverage stock owned by hedge funds in 3Q. Beam has quite a robust suite of brands that afford the spirit company a premium 26x trailing earnings valuation. Some of Beam’s top brands include Jim Beam and Maker’s Mark, while its fastest growing brands include Knob Creek bourbon and Effen vodka. Revenues are expected to be up 5% in 2013, driven by its strong U.S. presence, but expected growth in emerging markets will also play a role. Even with potential growth prospects that might be overlooked by investors – where the spirits company trades at 22x forward earnings compared to 26x trailing – Beam also pays a solid dividend yield of 1.5%.
Anheuser-Busch InBev NV (NYSE: BUD) came in at second with 27 filers. Anheuser-Busch trades at a premium to top peer Molson at 19x trailing earnings, but has some of the better prospects. Anheuser-Busch recently purchased its remaining stake in Modelo, which should be a driver of the beer company’s best-in-industry long term expected EPS growth rate of 13% annually. In addition to Anheuser-Busch’s growth opportunities, investors also receive a dividend that yields around 2%.
Constellation Brands (NYSE: STZ) beat out Anheuser for first with 29 filers. Constellation has a diverse product portfolio of wine, beer and spirits. Constellation trades at a steep discount to its major peer class at only 16x trailing earnings and 13x forward earnings, after seeing FY 2012 revenue drop 20% due to divestures of various wine and beer businesses. Constellation recently acquired a stake in the Crown Imports joint venture from Modelo for exclusive rights to distribute Corona-branded beer in the U.S. The move is a big one for diversification, and it gives the company a broader product mix away from being wine-heavy, so to speak. The cheapness of this stock on a P/E basis and its solid long-term growth rate make it solid ‘growth at a reasonable price’ pick with a PEG of 1.0. Billionaire Jim Simons’ Renaissance Technologies initiated a brand new position in STZ during the third quarter (see Simons’ top holdings).
We believe that the alcoholic beverage industry has held up well and will continue to do so over the interim, with the potential for improving sales as unemployment declines. The beverage companies with more access to the wine and spirit markets may perform better as the industry sees a fundamental shift away from beer, but the top hedge fund pick might be investors’ best bet – Constellation Brands – given its product mix. For a longer look at Constellation, continue reading its profile page at Insider Monkey.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam, Diageo plc (ADR), and Molson Coors Brewing Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!