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The Guilty Pleasures of Vice Stocks: Alcohol
With still such a heightened level of economic uncertainty clouding the near-term picture, many people seek comfort in their vices, while many continue to seek profits from their vice investments.
Vice stocks consist of those within sectors such as alcohol, tobacco, and gaming. The draw to this kind of investment is largely the idea that people will continue to feed their vices despite the economic climate. In addition, the top players in these vice industries tend to have solid grasps on the markets they serve, providing most decent levels of pricing power, while making it difficult for smaller companies to build their franchises.
In reality, vice stocks aren’t necessarily recession proof, and each industry faces its own set of unique obstacles. Still, appealing investment opportunities can be found in vice stocks during an economic downturn, as well as a recovery. And those interested have multiple options when it comes to a vice investment.
Last time around we looked at the Tobacco Industry, which has proven to be a rather sound defensive investment within the current economic climate. Now, with Oktoberfest right around the corner, what better time to turn our attention to the alcohol stocks within the Beverage Industry. And much like the local liquor store or town tavern, the group houses a number of different ways to play on the world’s adult thirsts.
Like Tobacco, demand for alcoholic beverages tends to hold up reasonably well in difficult economic times. That said, in an industry with varied price points, diverse global platforms, and fickle consumer tastes, trends do shift constantly.
This may help explain, somewhat, the range of performances of these stocks through the year, so far. Indeed, Boston Beer Company’s (SAM) stock price has soared through the first nine and a half months of 2010, while shares of foreign beverage distributor Central European Distribution Corp. (CEDC) has traded lower since the start of the year. (Fittingly, CEDC has the highest beta of the alcohol stocks covered by Value Line.)
One of the Industry’s continued shifts is the move to premiumization, providing a higher quality and class of beverage at a markup. Given the growing popularity of specialty drinks, wines, and microbrews, all companies here seem to be taking action. Such examples include Brown-Forman’s (BFB) expansion of the Jack Daniels brand, adding premium whiskey options. At the same time, brewers like Anheuser Busch InBev (BUD) and Molson Coors (TAP) are increasing their focus on craft-style beers. For a pure play on the growing popularity of craft beers, the independent Craft Brewers Alliance (HOOK) may be worth a look.
Investors are likely going to need some patience before this activity starts paying dues. For one, consumers are less likely to spend extra on premium beverages against a lethargic economic backdrop. And two, it takes time for these products to launch and gain enough marketing support and brand recognition before real results can be determined. Thus, the premiumization initiative should prove to be more of a mid- to long-term growth catalyst for these issues.
The more-noticeable, immediate trend, though, is that of consolidation. Anheuser Busch investors can attest to this, having cashed in a pretty penny in 2008 when the well-known American brewer was acquired. Molson Coors is another product of consolidation. And the company looks to take this acquisition strategy on a global tour, entering a pair of the world’s largest beer markets with the purchase of a brewer in Russia and a joint venture in China. This is likely a trend that will persist in the latter country, as the alcohol manufacturers take greater aim at the booming market.
Meanwhile, although it is difficult for smaller competitors to gain sizable market-share ground on the big boys, acquisitions have helped other larger companies jump into the segment. Specifically, Fortune Brands (FO) comes to mind. As the company began to build a diversified franchise, the acquisition of the Jim Beam brand immediately made it a formidable player in the spirits space. And for Fortune, it seems to be paying off, as healthy liquor volumes from brands such as JB and Maker’s Mark are likely to remain a driving force behind strong top-line growth this year and next.
It is clear, the Beverage Industry offers a little more diversity, as far as stock selections go, when compared with the Tobacco group. Momentum-driven investors would probably start their search with Boston Beer, which remains the group’s shining star this year, up over 40% year to date through mid-September. The brewer should remain in the Street’s favor in the near term, as it is poised to register solid sales and earnings growth over the next few years.
Those with longer-term investment horizons, however, may not be as inclined to love these shares. While annual sales and earnings advances should continue out to mid-decade, investors already appear to have priced in the bulk of these gains.
Brown-Forman’s product portfolio is diversified, but its 3- to 5-year growth prospects also seem to be reflected in its recent valuation. However, these shares cannot be knocked for lack of consistency, and those looking for a pure defensive alcohol play may want to think distilled spirits. This issue holds our Highest Safety rank (1) and top scores for Price Stability and Earnings Predictability. In addition, BFB offers a dividend yield right around the Value Line mean, while most of the equities in this group lack an income component.
Investors seeking a little more pizzazz over the 3- to 5-year horizon ought to turn to the grapes and Constellation Brands (STZ). Premiumization and brand support should help drive growth over the long haul. The stock has traded in a narrow range in the last few years, but it offers significant appreciation potential out to mid-decade.
Finally, there is Central European Distribution stock. This equity offers substantial recovery potential over the pull to 2013-2015, though it comes with quite a bit of risk (Safety rank: 4, Below Average). After all, this issue is less than two years removed from a plunge from nearly $80 a share to $6. Those unwilling to tolerate the volatility associated with this equity, which holds a low score for Price Stability, should not even consider a commitment here. Investors with stronger stomachs may find CEDC’s position in the very lucrative Eastern European spirits market the perfect catalyst for a rebound, as slow as it may be.
There is money to be made in the alcohol vice, and the industry offers a little more variety for investors. But if tobacco and alcohol don’t excite you the way the music of a slot machine and the neon lights of Vegas do, then Gaming stocks may be your best bet. Next time, we take a look at some casino and gaming issues that are less of a gamble then you may think.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.