What is the Best Move in Booze?
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Alcohol producer’s stocks have been getting recommendations for the last few years for some solid reasons. Some analysts believe in buying alcohol stocks in a bad economy since the unemployed masses will drown their sorrows. This idea doesn’t coexist with the data that points to a drop in sales for less expensive beer makers. Perhaps there are more useful trends to examine.
That brings us to the central question ‘which type of booze to invest in?’ Not only must one decide between the basic varieties, there are individual makers to consider. That’s what we Fools are here for, to separate the wheat (beer) from the chaff (not used to make alcohol) as far as stocks are concerned.
While there are very good arguments for diversification, some options are clearly better than others and complete diversification may not work in the long run.
Beer is possibly the trickiest of the alcohol possibilities. Major producers are seeing their market shares decrease while craft brewers are really gaining steam. While most of the major brewers have seen small drops in sales of typically less than 1% per quarter, craft brews in general have seen double-digit increases in sales percentages. But it’s harder to get into craft brewers since they tend to be small and privately held. Since craft brewers are the only recommendable beer stocks at present many of the stock opinionated favor Boston Beer Co. (NYSE: SAM) (makers of Sam Adams) and Craft Brewers Alliance (makers of Red Hook and others). Most real craft brew drinkers would not consider either of these makers to be real craft brew and they get recommended because they are the only ‘craft brewers’ big enough to be publicly traded. That means that beer isn’t a great play right now. The only real growth is from privately held brewers, many of whom produce in the thousands or tens of thousands of barrels annually. When craft brew connoisseurs want a treat, they reach for Fat Tire, Bell’s, Rogue or one of the other many fine brewers only beer cognoscenti know. Therefore, I don’t recommend beer stocks at present.
Premium wine and liquor may be the best moves since the affluent buyers of these products continue to do well. The more expensive craft brews are growing and the less expensive beers from majors are selling less, which also supports this theory of investing in products for the top half of income-earners.
In the liquor realm this points to Diageo plc (NYSE: DEO) a British company with vast top-shelf alcohol holdings. This includes Bailey’s, Gordon’s Gin, Johnny Walker, Bushmills, Captain Morgan, Guinness Beer and many others. Beyond that, Diageo is the world’s largest producer of Scotch operating many single malt distilleries and blending plants. As long as the top half of income-earners has it good, Diageo is a nice long term hold.
For wine, Constellation Brands, Inc. (NYSE: STZ) is the current sexy pick. They have exposure in liquor and beer, but are most notably the world’s largest wine producer. Since America is now the leading consumer of wine (somewhere a Frenchman weeps…) wine stocks are solid choices for the foreseeable future. Baby Boomers, the richest generation in America’s history, have been switching to wine in large numbers while the next two generations have started into wine at even younger ages than their forbearers. Constellation had a rough 2011, but the stock is now at close to its 52-week high. The P/E is around 13 and the cap is over $5 billion. The stock needs to break a ceiling, but growing wine sales should do the trick.
Two other alcohol companies drawing attention for long holds are Vina Concha y Toro S.A. (NYSE: VCO) and Brown-Forman Corp. VCO is a Chilean company that represents a ‘total package’ for the wine investor. VCO is involved with every facet of wine production managing its own vineyards, vinification & bottling plants as well as its own marketing. Its P/E is about 16 and the valuation is in the middle of the 52-week range. Most Fools pick it to outperform. Brown-Forman not only produces and sells alcohol, it makes barrels and bottles and is in the import and export business. This is a diversification within an industry (if that’s possible) and makes them an interesting alcohol stock. The P/E and valuation are a bit high, but dividends have steadily increased in the last 5 years.
With alcohol being an integral part of the successful life, smart moves in alcohol will pay well in the long run.
thedeswolf has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer and Diageo plc (ADR). 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.If you have questions about this post or the Fool’s blog network, click here for information.