After a roaring start to the year, Wall Street has had quite a rocky run in Q2. The market is down a bit since March 31, and investors who have enjoyed front-loaded returns in 2013 are now on the defensive.
Want proof? Consider that the Consumer Staples Select Sector SPDR ETF (NYSE:XLP) is up more than 4% in the past 30 days vs. an S&P 500 that is slightly in the red.
It makes sense that investors are moving into lower-risk sectors as gold melts down, blue-chip stocks continue to struggle with their top lines and seasonality threatens to throw a bucket of cold water on the rally. And one of the most attractive segments of the staples market to move into now — both for stability and for long-term growth — is the alcoholic beverages business. Here’s why:
- Baseline demand: In tough times, “sin stocks” peddling beer and spirits do very well. After all, if you can’t afford a tropical vacation, the least you can do is pour yourself a drink to unwind.
- Brand power: An entrenched alcohol brand — particularly in the spirits space — is difficult to unseat, both because of customer loyalty and the continued consolidation in the space via mergers and acquisitions.
- Emerging markets: As a growing middle class in Latin America and Asia develops a taste for Western products, beer and whiskey sales continue to see nice growth in these regions. Consider that Irish whiskey sales volume jumped 22.5% last year thanks to emerging market demand.
If you want to get a little defensive with your portfolio but still have the potential for growth, beer and spirits stocks are a good option right now. Three in particular that I like are mega-brewer Anheuser-Busch InBev (NYSE:BUD), spirits giant Diageo (NYSE:DEO) and midcap whiskey giant Beam Inc. (NYSE:BEAM).
Mega-brewer Anheuser-Busch InBev (NYSE:BUD) is not just a stable staples stock; it is one of the biggest and most entrenched companies in the world. BUD is a $150 billion company — larger than retail giant Amazon.com (NASDAQ:AMZN) or oil powerhouse BP (NYSE:BP) measured by market capitalization. BUD does about $40 billion in annual revenue across more than 130 countries, and it’s the largest brewer in the world by several metrics.
In fact, Anheuser-Busch InBev is so huge that its proposed buyout of emerging-market beer stock Grupo Modelo (PINK:GPMCF) ran into trouble earlier this year because of antitrust concerns, and BUD will have to divest the entire U.S. arm of Modelo to appease regulators. That should tell you everything you need to know about how dominant this beer stock is … and how aggressive it’s willing to get to pursue emerging-market growth. Modelo’s market share in Mexico is more than 60%, and BUD is willing to buy the whole enchilada and divest U.S. operations just to get in on this fast-growing marketplace.
BUD is flying high on projections of roughly 10% revenue growth in fiscal 2013 over last year. Thanks to this improvement coupled with optimism over the Modelo buyout, the stock is up 36% in the last year to lap the S&P 500 about three times.
But don’t think the acquisition pop will be short-lived. Longer-term, Anheuser-Busch InBev has doubled since January 2010 while the S&P is up about 40% — thanks in part to efficiencies and continued growth after the blockbuster $52 billion merger deal announced in 2008 between InBev and Anheuser-Busch.
The 1.7% dividend yield isn’t grand compared with other spirits players, and the valuation is a bit rich at a forward P/E of around 18. But cash flow is strong, and after the Modelo deal is closed, there could be a renewed effort to get cash flowing back to shareholders in the form of bigger dividends and buybacks.
What BUD is to beer, Diageo (NYSE:DEO) is to spirits. Its brands include top sellers Smirnoff vodka, Johnnie Walker whisky, Baileys Irish Cream and Guinness stout, to name a few. Diageo will top $17 billion in annual revenue this fiscal year and has a market capitalization of about $75 billion, to rival media giant News Corp. (NASDAQ:NWSA) and automaker Honda (NYSE:HMC) in size.
And just as Anheuser-Busch InBev has rolled up the brewing space lately, DEO has been on an acquisition tear. In 2011, it purchased Turkish liquor company Mey Icki for more than $2 billion. In 2012, it did another $2 billion deal to acquire a majority stake in India’s United Spirits. And who knows what’s next for Diageo in 2013.
While DEO has been sleepy in 2013, lagging the S&P 500’s gains since Jan. 1, the stock has outperformed handily over the last 12 months. Longer-term, Diageo stock is up 75% since January 2010 vs. about 40% for the S&P.
And that’s just share price, by the way. DEO pays a respectable 2.4% dividend (despite its big spending on acquisitions) and substantially hikes its payments every year.
Fundamentals are strong, too, including a roughly double-digit sales jump in 2012. Revenue should grow at a similar clip in 2013, but earnings are forecast to improve by more than 30% thanks to strong overseas demand. Sales of Johnnie Walker in China soared more than 60% last year, proving both the power of this fast-growing market and the might of the brands in the Diageo portfolio.
Also a plus: With a forward price-to-earnings ratio of under 17, it has one of the lower earnings multiples in the fast-moving spirits segment. Thanks to the recent sluggishness in shares, the company seems fairly valued for new investors right now.
Beam Inc. (NYSE:BEAM) is a much smaller company than the other two, with a market size of about $10 billion. But that gives Beam an edge for investors — because in addition to a powerful lead brand in its namesake Jim Beam, it also has big buyout potential that could pay off for investors who front-run a deal.
First, let’s talk stability. Beam owns Courvoisier cognac, Sauza tequila and Maker’s Mark along with its Beam bourbon. In addition to brand power in the U.S., this lineup is catching on big-time abroad — especially in India, where the company has seen an annual growth rate north of 25% across the last five years. Clearly despite its smaller market size, BEAM is not a bit player.
That should make you feel good about holding this stock even if it doesn’t break out. Spirits heavyweight Diageo might want to look beyond scotch and into bourbon with Maker’s Mark or Jim Beam. Or midsize beverage player Brown-Forman (NYSE:BF.B) might reach for Beam to get its Sauza tequila business, among other labels, and diversify its product line.
Beam is certainly more speculative than the other entrenched beverage stocks named here. It has lagged the market in 2013, and has pretty much paced the S&P in the past 12 months. With a forward P/E of 22, Beam is admittedly a bit frothy — but investors might want to drink up the stock on a pullback.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.