4 alcohol stocks for good times and bad

Spending on beverages doesn't drop much when the economy slumps. Here's why these picks are great even in a recovery.

By StreetAuthority Apr 29, 2014 1:31PM
A pint of Guinness at Mulligans Pub, in Dublin, on July 4, 2012 (© Tim Clayton/Corbis)By Eric Winter

Whoever said drinking, smoking and gambling were habits of poor men got it all wrong.

So-called "sin stocks" have long been known to give investors reprieve in both good times and bad, flourishing in bull markets and offering consolation during downturns.

Alcohol, tobacco, gambling and certain other categories of entertainment (ahem) are all considered sin, or vice, stocks, with some funds and analysts grouping defense stocks into the mix as well. In this article, I'll focus on my favorite makers of alcoholic drinks.

As is often the case with alcohol, spending doesn't drop drastically (and may actually increase, in some cases) when the economy stumbles. And what is frequently the reaction when the market recovers and makes new highs? Why, pop the bubbly, break out that nice bottle of wine, or buy a few rounds at the bar, of course!

The name of the game for alcohol producers in 2013 was fighting weak foreign demand, solidifying domestic brewers as the standout winners. Will 2014 continue this trend, or can we expect the mega-breweries and distillers to gain their footing again?

With a market cap of $175 billion, Anheuser-Busch InBev (BUD) is far and away the largest brewer on my analysis list. With such ubiquitous brands as Budweiser and Michelob, Anheuser-Busch has the added benefit of participating in the soft drink, bottled water, and tea businesses. However, BUD hasn't kept pace with the overall market over the past 12 months: Its gain of 12 percent has lagged behind the S&P's increase of 18 percent.

Pushing forward in emerging markets despite poor growth gives BUD a solid argument as a long-term investment, especially since emerging markets bottomed in February and have since bounced. The 3.7 percent dividend yield and rising forward price-to-earnings (P/E) ratio sweeten the pot as well.

Diageo (DEO) was the biggest laggard of this group last year, remaining essentially flat. The main reason for this is that Diageo operates on the more premium spectrum of the business, with brands such as Johnnie Walker, Ketel One and Guinness. Those brands suffered abroad due to turmoil and weaker overall spending.

However, as is the case with BUD, those foreign consumers give reason to accumulate DEO at current levels. Improving prices in international equities and a rising middle class in China and India should bolster demand for premium spirits, and Diageo is poised to deliver. DEO also offers a yield of 2.1 percent, appeasing income investors until growth kicks in again.

Molson Coors (TAP) has a unique geographical advantage in that its main areas of operation are Canada, the U.S., and the U.K. Molson Canadian, Coors Light and Blue Moon are some of the signature brands offered by Molson Coors. The stock kept pace with the market in the past year, beating slightly by a few percentage points. TAP's lack of exposure to emerging markets kept the stock in bull territory but could mean slow growth going forward.

Wall Street analysts agree, with a majority recommending to hold. Nomura Securities dropped the brewer from "buy" to "hold" in early April, setting a price target at $60. TAP does pay a respectable yield of 2.5 percent.

Boston Beer Co. (SAM) has been a runaway hit with investors, bestowing those who bought in this time last year with a whopping 41 percent gain. Why the incredible run-up? As touched on above, the brewer of Samuel Adams has kept its craft status and operates mainly in the United States, giving it exposure to strong domestic demand and selling 3.4 million barrels of its brands last fiscal year.

Boston Beer's continued innovation with its Samuel Adams, Twisted Tea and Angry Orchard brands have certainly propped up the stock price, but long-term investors may see some cause for concern. The stock is trading in overbought territory, boasting a sky-high trailing P/E of 46. In addition, SAM does not pay a dividend.
Risks to consider: The recovery of emerging markets in 2014 could spell big profits for the larger breweries and spirits producers, but unforeseen troubles (think Venezuela, Ukraine, and so on) can always creep up to affect multinationals' bottom lines. Exaggerated P/Es for smaller breweries, especially in SAM's case, may foretell a retraction for those stocks.

Action to take: Resiliency and high yields make these stocks attractive investments, but keeping abreast of larger market trends can help you to allocate and time your capital more wisely. The larger companies could be standout hits for the long-term from both growth and income standpoints. SAM could continue to rise with U.S. demand, although it may not be a bad time to take profits.

Eric Winter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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