Friday, 26 August 2011

Stocks to Drown Your Sorrows or Lift Your Spirits

Let's face it, the stock market has not been very strong lately, what with European and USA debt troubles and other assorted ills of the world threatening another recession or another Lehman crash. It's enough to drive an investor to drink! Instead of drinking maybe the thing to do is invest in distillers, wineries and breweries.

Why Booze Stocks?
That this is more than joking possibility, do a Google search with words like sin stocks (among which booze is counted) and recession. There will be a raft of articles, many of them saying that such stocks do well in bad times, e.g. The Virtues of Vice Stocks at and Living with Sin Stocks at There is even an academic study Sin Stock Returns over the Business Cycle that found " ... the abnormal return on the sin portfolio is higher during recessions than during expansions ..."

The following chart from Google Finance for the Alcoholic Beverages sector appears to add support for the idea as it shows it outperforming the S&P 500 through the last recession, though most of the gains seemed to occur once recovery was underway.

Finding the Stocks and their Data
The first step to look at the sector is to find the booze companies listed in Canada and the USA. There is not one source or tool that contains everything. This blog's data is an amalgam of these sources:
  • TMX Money's Stock Screener - set the Sub-industry choice to Beverages - Brewers or Wineries and Distilleries under Consumer Goods
  • Yahoo Finance's Industry Center under the Investing tab - pick Beverages - Brewers or Wineries and Distilleries
  • Google Finance - pull up a quote for a company in the sector such as Diageo (NYSE: DEO) and the result will show other stocks in the sector with their key financial ratios.
  • GlobeInvestor's My Watchlist - enter the stock symbols to create a portfolio to get most of the financial data we present below. Export the data to your own spreadsheet and then you can enter missing data using the other sources. N.B. Every investor must acknowledge that all data sources are subject to incompleteness and error - yes, sometimes the published numbers are wrong. Anything that looks unusual bears double checking with other sources, or with the company's own annual or quarterly reports.
Profitability and Growth
Most of these companies have been steady performers through the last five years, earning profits every year, even through 2008 and 2009. The number of good performers shrinks when other measures of company quality, such as Operating Profit Margin and Return on Shareholder Equity. Less than half managed to grow profits in the latest year. Only one company looks very weak - Craft Brewers Alliance (Nasdaq: HOOK) with profits in only 3 of the past 5 years, low operating margin and low return on equity.
Best Stocks on these measures:
  • Brown-Forman (NYSE: BF.B) - Earnings every year including growth last year, high operating margin and return on equity, dividend growth. Provides Southern Comfort, literally and metaphorically.
  • Companhia de Bebidas das Americas ADS (NYSE: ABV) - Giant company that has been growing profits and dividends at an astonishing pace given its humongous size. Outstanding operating margin and return on equity.
  • Molson Coors Brewing (NYSE: TAP) - Solid numbers across the board, better than the similar Canadian company.

Value - Which are Cheaply Priced Right Now?
There are a number of companies cheaply priced relative the industry average Price / Earnings (P/E) ratio and where Price to Book Value is near or below 1.0 or where the Price to Sales ratio is very low. Amongst the previous set of solidly profitable companies only one, Molson Coors, seems cheap. The other highly profitable companies, especially ABV, look to be getting a high market valuation.

Returns and Market Sentiment
Reading this table, we are lead to question whether the future may not be like the past. A different set of companies has experienced strong positive returns and enthusiastic Strong Buy recommendations from professional stock analysts. The one exception is ABV, which seems to be favoured by a Strong Buy despite its already phenomenal growth (No, the target price is not an error being below current market, that's what the data source shows, a reminder that numbers are not always correct. I double-checked the Strong Buy from My Watchlist against the one in TMX under the stock quotes research tab for ABV and it shows the same analyst recommendation so the target price must be wrong.)

Safety - How Risky is the Company and How Sure is the Dividend?
Debt is the principal danger to companies trying to weather economic storms so the amount of debt relative to various company metrics gives us a quick view of which companies look solid or dodgy. Constellation Brands (NYSE: STZ) and Diageo (NYSE: DEO)both have a lot of debt compared to the equity in the company, while Andrew Peller (TSX: ADW.A) has a high level of debt compared to cash flow, as does Constellation.

Four companies already pay out a high percentage of earnings as dividends (see table below), indicating a lesser likelihood of increases in the near future, though none is so high that dividend cuts would seem likely. Companies with 30% or less payout ration, highlighted in green numbers on the table, may be inclined to increase it, while those paying out nothing at the moment have the potential to start doing so if they have been consistently profitable. An example of the latter is Magnotta Winery (TSX: MGN).


Best Prospect - Molson Coors for its combination of consistent profitability, record of rising dividends and good valuation metrics

Fully-Valued but Solid Companies - Diageo, Brown-Forman, Companhia de Bebidas and Compania Cervecerias Unidas (NYSE: CCU)

Turn-around Prospect - Constellation Brands Inc. (NYSE: STZ) which has hit a rough patch but claims it is fixing things

Note that the above is based only on this preliminary assessment using the numbers in the tables. Further investigation of each company's prospects and conditions will be needed to confirm good and bad situations suggested by the numbers. Otherwise an investing hangover may result!

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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