Reports of alcohol’s death have been greatly exaggerated. And that has created a buying opportunity in booze-related stocks.
The reports claim the younger generation isn’t drinking so much. They’re opting for a healthier lifestyle, or they’re choosing from among the growing supply of alternative mind-numbing substances. So, investors are concerned about the future of the booze business. And they’ve sold off the stocks to historically low fundamental values.
What investors are forgetting, though, is the older generations are still boozing it up. And the alcohol companies have a remarkable ability to evolve, and to alter marketing strategies to ensure some level of growth.
The bottom line is alcohol isn’t going away. But alcohol stocks are priced as if it is.
For example, shares of Anheuser-Busch InBev (BUD) were trading at $66 last October. They hit $46 in January. Constellation Brands (STZ) was trading above $250 per share five months ago. It traded as low as $150 earlier this month. And Molson Coors Beverage (TAP) traded above $63 in November, but dipped below $53 in January.
At those discounted prices, alcohol stocks were as cheap as they’ve been in at least a couple of years. And the valuations were near the lows of their historical ranges.
Constellation Brands, for example, at $150 per share traded at just 11 times forward earnings. That’s a 50% discount to its historical forward price/earnings ratio. STZ traded for less than 3 times book value – where its normal book value multiple is closer to 5.
That was enough to prompt Warren Buffett’s Berkshire Hathaway to establish a beginning position in Constellation Brands. It was a relatively small purchase – just $1.2 billion worth. But it was Uncle Warren’s first venture into the alcohol business. And the news of his purchase has helped STZ bounce to above $176 per share.
It looks to me like booze stocks have bottomed, and we’re in the early stages of an alcohol-related rally. If that’s true, alcohol stocks could be sharply higher in the weeks and months ahead.
Best regards & good trading,
Jeff Clark