Constellation Brands, Inc. (STZ): Hedge Funds Are Snapping Up

A market correction in the third quarter, spurred by a number of global macroeconomic concerns ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let’s study the hedge fund sentiment to see how those concerns affected their ownership of Constellation Brands, Inc. (NYSE:STZ) during the quarter.

Is Constellation Brands, Inc. (NYSE:STZ) worth your attention right now? Money managers are turning bullish. The number of bullish hedge fund positions inched up by three during the last three months of 2015. STZ was in 67 hedge funds’ portfolios at the end of December. There were 64 hedge funds in our database with STZ holdings at the end of the previous quarter. At the end of this article we will also compare STZ to other stocks including L Brands Inc (NYSE:LB), Marathon Petroleum Corp (NYSE:MPC), and HCA Holdings Inc (NYSE:HCA) to get a better sense of its popularity.

Today there are tons of gauges stock market investors employ to analyze their holdings. A couple of the less utilized gauges are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the top picks of the top hedge fund managers can outclass the market by a significant margin (see the details here).

One of the shareholders of Constellation Brands is activist Dan Loeb’s Third Point. In its second-quarter letter to investors, Third Point discussed Constellation Brands. Here’s what the fund said about the company:

“A compounder that has quietly been making a contribution to our portfolio for several years is Constellation Brands which sells beer (more than 60% of its profits), wine, and spirits, primarily in the United States. We bought our first shares in 2012, when Anheuser-Busch InBev reached an agreement to buy the half of Modelo it didn’t already own and set in motion a course of events that would ultimately result in Constellation acquiring full control of Modelo’s portfolio of iconic Mexican beer brands like Corona and Modelo Especial in the United States market.

Like many of our investments, Constellation started as an event-driven trade – in this case, a transformative acquisition. However, over time, the situation has evolved into a compelling multi-year earnings growth story in a sector (consumer staples) where organic growth isn’t always easy to find. We now see a clear path to approximately $7.50 of cash EPS (using company’s cash tax rate) in calendar 2017 driven primarily by strong volume trends and self-help margin improvement for the beer business. Beer volumes have been growing at an impressive high single digit rate since Constellation assumed full control of the larger business. We expect the company will benefit from strong volume trends for some time given favorable Latino demographic trends and the meaningful opportunity to increase distribution for brands like Modelo Especial, while also introducing new formats like draft and cans for Corona.

Margin improvement should start coming soon from purchasing savings associated with a new glass sourcing strategy, as well as manufacturing efficiencies and transportation savings associated with a $1 billion brewery expansion project currently underway in Mexico. Constellation is currently sourcing about 45% of its beer volumes at cost from older Modelo breweries that are less efficient and farther away from the US border (as part of a transition supply agreement with Anheuser-Busch InBev) until the brewery expansion project is complete, and the company can satisfy its own supply needs. We are focused on calendar 2017 since it will take some time before the full benefits of those initiatives are captured.

Finally, as capital expenditures return to more normalized levels, the company will be in a position to more aggressively return capital to shareholders. Management recently initiated a modest dividend and we expect share buybacks to become a bigger part of the story going forward given the sizeable free cash flow and incremental borrowing capacity from holding leverage constant.

Despite its strong share price performance, the stock only trades for about 16x our calendar 2017 cash EPS forecast and we see plenty of room for the multiple to re-rate. Few consumer staples companies are growing volume, sales, and earnings on an organic basis as quickly as Constellation Brands, and those that are doing so trade for significantly higher multiples.”

With all of this in mind, we’re going to take a peek at the key action surrounding Constellation Brands, Inc. (NYSE:STZ).

What have hedge funds been doing with Constellation Brands, Inc. (NYSE:STZ)?

At Q4’s end, a total of 67 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the previous quarter. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Michael Lowenstein’s Kensico Capital has the biggest position in Constellation Brands, Inc. (NYSE:STZ), worth close to $905.9 million, corresponding to 18.7% of its total 13F portfolio. Sitting at the No. 2 spot is Lone Pine Capital, managed by Stephen Mandel, which holds a $762.2 million position; 3.3% of its 13F portfolio is allocated to the stock. Remaining professional money managers that are bullish consist of Boykin Curry’s Eagle Capital Management, Dan Loeb’s Third Point and Doug Silverman and Alexander Klabin’s Senator Investment Group.

Now, key hedge funds have been driving this bullishness. Tiger Eye Capital, managed by Ben Gambill, assembled the largest position in Constellation Brands, Inc. (NYSE:STZ). Tiger Eye Capital had $46.7 million invested in the company at the end of the fourth quarter. Clint Carlson’s Carlson Capital also made a $23.2 million investment in the stock during the quarter. The other funds with brand new STZ positions are Andrew Sandler’s Sandler Capital Management, Zach Schreiber’s Point State Capital, and Benjamin A. Smith’s Laurion Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Constellation Brands, Inc. (NYSE:STZ) but similarly valued. We will take a look at L Brands Inc (NYSE:LB), Marathon Petroleum Corp (NYSE:MPC), HCA Holdings Inc (NYSE:HCA), and Imperial Oil Limited (USA) (NYSEAMEX:IMO). This group of stocks’ market valuations match STZ’s market valuation.

As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $2.11 billion. That figure was $5.35 billion in STZ’s case. HCA Holdings Inc (NYSE:HCA) is the most popular stock in this table. On the other hand Imperial Oil Limited (USA) (NYSEAMEX:IMO) is the least popular one with only eight bullish hedge fund positions. Constellation Brands, Inc. (NYSE:STZ) is not the most popular stock in this group, but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard HCA might be a better candidate to consider a long position.