Recession-Proof Stocks – Distilleries $DEO, $BF-B, $BEAM, $STZ

In a recession, three things are certain – gold prices go up, discount stores prosper and people drink. They drink to celebrate, drink to forget or just drink to socialize – whatever the reason, alcohol-based stocks tend to withstand recession well. The only question is which company do you go with? Much like the battle between the Coca-Cola Company (KO) and PepsiCo (PEP), these stocks vary in market cap and are constantly battling each other for a top positions. Also, unlike wines or beers which have a respectable craft market, very few people or companies attempt making small batch liquors, so if consumers want Scotch, vodka, whiskey, gin or tequila, they have to buy it from one of the big boys – Diageo Plc (DEO), Brown-Forman Corporation (BF-B), Beam (BEAM) or Constellation Brands Inc (STZ). To get a better idea where these stocks are right now, we are going to take a closer look at their pricing, volatility, earnings growth and hedge fund interest.

Bill Ackman

P/E RATIO

First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, STZ had the lowest forward P/E ratio at 8.99. BF-B was next at 18.24, followed by DEO at 20.93 and BEAM at 21.27.

VOLATILITY

We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. BF-B had the lowest beta of the stocks we looked at. It has a beta of just 0.59. STZ is next at 0.69, followed by DEO at 0.80 and BEAM at 1.69.

EARNINGS GROWTH

Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. STZ’s earnings grew 5.90% over the last five years. They are expected to increase 10.75% over the next five years compared to expectations of 14.38% for its industry. DEO’s earnings grew 3.03% over the last five years and are expected to grow 10.30% over the next five years. BEAM’s earnings growth is somewhat volatile. Its earnings shrank -16.75% over the last five years. They are expected to grow 13% over the next five years. BF-B was the most consistent of the group. It grew 8.11% over the last five years and is expected to grow 9.75% over the next five years.

HEDGE FUND OWNERSHIP

Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Of the companies we looked at, BEAM was the most popular. Of the 300+ hedge funds we track, 30 had positions in BEAM at the end of the second quarter. BEAM was very popular with Bill Ackman’s Pershing Square. The fund had over 17% of its portfolio invested in the company, a position worth almost $1.1B. BF-B, a favorite of Tom Russo’s Gardner Russo & Gardner, and STZ, a top pick for Jim Simons’ Renaissance Technologies, were tied at 16, followed by DEO at 14, also a favorite of Tom Russo’s Gardner Russo & Gardner.

THE BOTTOM LINE

After looking at the numbers, we like DEO or BEAM best. BEAM we like largely for Ackman’s involvement. Ackman is an activist investor with a large stake in the company. He has done well in the past protecting value for shareholders and there is no reason to think he wouldn’t in this case also. Further, Ackman has turned companies around owning much less than 17%, which could mean that he is particularly involved with this company. DEO has the largest market cap at $52.02B whereas the other companies on our list were all smaller than $11B. It also had low volatility and hit average on all the metrics we looked at, making it a well-rounded runner.

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