3 reasons to toast small-cap beverage stocks

Picks like Boston Beer and Willamette Valley Vineyards have much more potential than the industry giants.

By Benzinga Feb 24, 2014 12:00PM

Boston Beer Co.'s Samuel Adams Brewery in Boston, Mass. (© Scott Eisen/Bloomberg via Getty Image)By Jonathan Yates

When Coca-Cola (KO), Anheuser-Busch InBev (BUD) and Pepsico (PEP) are disappointing investors, that signals a new paradigm in the beverage sector.

Pepsico, Anheuser-Busch InBev and Coca-Cola are still great companies with a place in every portfolio. But what is becoming more obvious is that small-cap beverage stocks like Willamette Valley Vineyards (WVVI), Boston Beer (SAM), and High Performance Beverages (TBEV) have the most potential.

Coca-Cola, Anheuser-Busch InBev and Pepsico are simply too big to deliver big growth anymore.

For the past five years, earnings-per-share growth for Coca-Cola was 9 percent. Over the next five years, the analyst community expects it to be 5.55 percent. It is the same story for PepsiCo. By contrast, earnings-per-share growth is expected to be 21.16 percent next year for Boston Beer Company.

It is becoming a niche market for consumer goods.

Coca-Cola and PepsiCo realize this and try to compete by gobbling up competitors. Most mergers and acquisitions fail as too much is paid. It is also tough to duplicate the secret sauce that results in a small-cap consumer company like Boston Beer, Willamette Valley Vineyards, or High Performance Beverages carving out its loyal following. With a Coca-Cola or a Pepsico, these just become another product line. Or their own, they are the star performer receiving all the best talent and resources.

Coca-Cola, Anheuser-Busch InBev and Pepsico are not acquisition targets, either.

Niche beverage companies like Boston Beer, Willamette Valley Vineyards or High Performance Beverages could be. As a recent case in point, Anheuser-Busch InBev just acquired Blue Point Brewing Company, a craft beer maker from Long Island. A major part of Coca-Cola's expansion campaign in China is focused on buying niche entities in the country.

Anheuser-Busch InBev, Coca-Cola and Pepsico are all down for 2014.

The slow, steady growth of each and solid dividend income creates a role for those beverage giants in the holdings of all investors. But the days of high growth for Anheuser-Busch InBev, Coca-Cola and Pepsico are over. It is small caps in the beverage sector like Willamette Valley Vineyards, Boston Beer Company and High Performance Beverages that have more potential for growth, both in sales and for the stock price.

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