{"id":35185,"date":"2013-01-09T15:54:30","date_gmt":"2013-01-09T20:54:30","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=35185"},"modified":"2013-01-09T15:54:30","modified_gmt":"2013-01-09T20:54:30","slug":"a-hangover-in-booze-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/01\/09\/a-hangover-in-booze-stocks\/","title":{"rendered":"A Hangover in Booze Stocks?"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

\"booze\"<\/a>For the past year, it\u2019s been a swinging-from-the-chandeliers party in booze stocks.\u00a0 High-end alcohol distillers have kept investors buzzed in an otherwise sobering stretch.<\/p>\n

Diageo (NYSE: $<\/span>DEO<\/a>)<\/b>, the biggest and best diversified of the lot, is up 37% over the past 52 weeks.\u00a0 But Pernod-Ricard (Pink:$<\/span>PDRDY<\/a>)<\/b> and Beam, Inc. (NYSE:$<\/span>BEAM<\/a>)<\/b> are both up more than 20%, and Brown-Forman Corp (NYSE:$<\/span>BF-B<\/a>)<\/b>, the maker of the iconic Jack Daniels Tennessee Whiskey, was up by nearly 35% through early December before backing off recently.<\/p>\n

These are fantastic numbers for a mature business like spirits.<\/p>\n

In early November, I wrote favorably about booze stocks, noting that \u201cthe p<\/i>remium spirits business has been a rare source of growth in recent years, much of which has been generated by rising sales to emerging market consumers and particularly Chinese consumers.\u201d<\/i> (See \u201cWhiskey Stocks to Burn the Throat<\/a>\u201d<\/strong>).<\/p>\n

All of this is still true, of course.\u00a0 In fact, with China recovering, it\u2019s truer than ever.<\/p>\n

Furthermore, in their branding, high-end spirits companies have major intangible assets that take decades to build and are almost impossible to replicate.\u00a0 To give an example, in much of South America \u201cwhisky\u201d does not refer to a type of distilled spirit.\u00a0 It specifically means Johnny Walker scotch, and usually Black Label.\u00a0 This kind of branding power creates incredible barriers to new entrants.<\/p>\n

It would be virtually impossible to start a new scotch brand today (see \u201cDiageo: the Ultimate 12- to 18-Year Play<\/a>\u201d<\/strong>) and this is a fact that is not lost on investors in the sector.<\/p>\n

An exception would be high-end vodka, which is subject to trendiness and tends to have trouble building a dedicated clientele.\u00a0 The \u201cit\u201d vodka at posh bars tends to change from year to year.\u00a0 There is a reason for this. Vodka doesn\u2019t have to be aged and has no \u201cofficial\u201d standards.\u00a0 Anyone with a deep-pocketed marketing team can create a new \u201cpremium\u201d brand, mass produce it in a factory, and pimp it at bars a week later.<\/p>\n

And let\u2019s not forget that all vodka tastes like water (it\u2019s the only spirit for which \u201cquality\u201d is defined by how watery it tastes), and for most people it\u2019s just something to mix in a cocktail.\u00a0 I consider it an ingredient for girly drinks that no self-respecting man should ever be seen drinking in public (with the possible exception of a vodka martini, and even then only if your name is Bond\u2026James Bond<\/a><\/strong>).\u00a0 You would never see \u201cSkinny Girl Bourbon,\u201d dammit.\u00a0 And if we do, I swear I\u2019ll quit drinking.\u00a0 Forever.<\/p>\n

I digress, but my points stand.\u00a0 Liquor is a fantastic business to be in.<\/p>\n

Unfortunately, I can\u2019t say the same for liquor stocks.\u00a0 At current prices, they are simply too expensive.\u00a0 Beam, Inc., which was a recommendation of the Sizemore Investment Letter<\/i> until recently, trades for nearly 30 times earnings.\u00a0\u00a0 Brown-Forman trades for nearly 25.<\/p>\n

Part of this is due to hopes that Diageo or Pernod-Ricard will make a bid for one or the other (or both) as a way to strengthen their position in the lucrative American whiskey market.\u00a0 But as I wrote recently<\/a>, \u00a0such a deal would seem unlikely at the moment.\u00a0 Diageo is busy absorbing some of its other acquisitions of recent years, and Brown-Forman and Beam have market caps of 13 billion and 10 billion, respectively.\u00a0 That would be a big shot glass to swallow for either Diageo or Pernod-Ricard.<\/p>\n

So, you have a buyout premium built into the prices of stocks that are not likely to get bought out anytime soon.\u00a0 That\u2019s a hard sell.<\/p>\n

Diageo itself is modestly overpriced at 23 times earnings.\u00a0 If you already own Diageo and you have a long time horizon (and Sizemore Capital does own Diageo in some client accounts), I think it is reasonable to hold on and reinvest your dividends.\u00a0 But at current prices, I would not recommend making any large new investment.<\/p>\n

In 2012, we enjoyed the party in booze stocks.\u00a0 But at this point, I recommend tossing your car keys to the barkeep and catching a cab.\u00a0 2013 might bring a mean hangover.<\/p>\n

SUBSCRIBE <\/a><\/strong>to Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

The post A Hangover in Booze Stocks?<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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