Beer, wine and spirits stocks have become a little watered down in recent months. The exact reason isn’t clear, although it’s entirely possible that after many years of double-digit returns, the industry’s stocks have run out of gas and are taking a breather.
Not to worry. Any weakness in booze stocks gives investors a chance to get in the game.
FolioInvesting.com has a ready-to-go folio aptly named Wine, Beer and Spirits, and it points out that booze stocks tend to be less affected by price increases and economic downturns, thus acting as a good hedge in market corrections. If anything, people drink more in difficult economic conditions, making alcohol the crème de la crème of consumer staples stocks.
There are several ways you can invest: You can buy FolioInvesting’s offering by simply opening an account and depositing some cash. Or you could buy iShares’ Global Consumer Staples ETF (NYSE:KXI), a collection of 105 stocks, including most of the 18 from FolioInvesting. A third option is to buy the Vice Fund (MUTF:VICEX), a mutual fund that has been around since 2002 and has outperformed the S&P 500 by 274 basis points annually since then.
Any of these would be a sensible investment. However, I’m going to give you a fourth option by creating a four-stock mini-motif through Motif Investing that invests in micro-, small-, mid- and large-cap booze stocks. Make it a small part of your overall investment portfolio, and you should do just fine in the long term:
While I’m a big fan of Diageo (NYSE:DEO) because of its stellar brands, I have to go with Femsa (NYSE:FMX), the Mexican drinks conglomerate that owns 48.9% (63% voting control) of Coca-Cola Femsa (NYSE:KOF), 20% of Heineken (PINK:HEINY) and 100% of Oxxo Convenience Stores.
Femsa’s beverage and retail investments are first-rate. The company’s assets have helped the stock achieve an annualized 10-year total return of 26% — more than three times what the S&P has done in that time, and twice Diageo’s return.
Also of interest: Bill Gates owns almost 8% of its stock.
I just love family-owned businesses. Brown-Forman (NYSE:BF.B) is controlled by descendants of George Garvin Brown, who first started making whiskey in 1870. The various branches of the Brown clan hold a 27.5% economic interest in the company, but more importantly have 69.3% of the votes. Its CEO, Paul Varga, although only 48, has been with the company for 25 years.
When Varga joined in 1988, Brown-Forman’s annual revenue and operating income were $1.35 billion and $192 million, respectively. Today, its annual revenues are $3.6 billion with an operating profit of $788 million. And in those 25 years, the company’s operating margin has increased by more than 50%.
Although Jack Daniel’s is the company’s signature brand, Finlandia vodka and Southern Comfort also are strong sellers. Of the world’s top 10 spirits, Jack Daniel’s is the fastest-growing brand. And most of that growth is from outside the U.S., where Brown-Forman generates 58% of its revenue (up from 23% a decade ago).
Small-Cap: Boston Beer
Jim Koch founded Boston Beer (NYSE:SAM) in 1984. In a great article about craft beer in the Boston Globe, Koch recalls how he and a business partner had an initial goal to get Sam Adams’ Boston Lager into 100 accounts in the Boston area. When they succeeded, the two men attempted to go to as many of those accounts in one night, drinking a pint at each.
They got to 23 before last call.
Hangovers aside, the company has become the largest craft brewer in America with about 1% of the beer market. A little more than two years ago I recommended investors forget about Molson Coors (NYSE:TAP) and buy Boston Beer instead. My rationale? That someday Molson Coors or some other behemoth would pay a pretty penny to own one of the most respected brewers in America.
Since then, SAM stock is up 71%, compared to 32% for Molson Coors. With diluted earnings per share expected between $4.70 and $5.10 in 2013, the stock has all but guaranteed its future appreciation potential.
Microcap: Craft Brew Alliance
Although I’ve written about Craft Brew Alliance (NASDAQ:BREW) in the past, I didn’t realize that its West Coast beers made it to the other side of the country. But sitting on the shelves of the local Publix were several types of its Kona brand, the Hawaii brewery it bought in 2010 — a very good sign for the company.
Despite its best efforts (my Florida example) to get products outside its western base, Craft Brew Alliance still generates 81% of its revenue out west. The potential in the Midwest and Southeast is tremendous.
The craft beer business is only getting started. Growing at close to 10% annually, it’s eating up market share from the traditional brewers, whose own growth is shrinking by approximately 2% annually. BREW is the fourth largest craft brewer in terms of retail dollar sales behind only Sam Adams, Sierra Nevada and New Belgium. Kona has been a big part of its growth, increasing 19% year-over-year.
Most importantly, Anheuser-Busch InBev (NYSE:BUD) owns 32% of BREW stock and distributes its product. Eventually, the relationship could become even closer. Stay tuned.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.