The Wages of SIN! (BF.B,QQQ,SLV)
There’s not enough time in the day to catalog all the possible sources of information, all the data series and analytics that Wall Street produces on the broad market and specific asset classes and stocks – let alone read them.
One has to focus on the macro if one wants to be a generalist. Or specialize, if one prefers to be a niche player.
But here at Normandy, we attempt to do both. We have our advisory group that meets once a month to discuss longer term trends and possible near term surprises. And we have our in-house analysts and interns who crunch the numbers and scan the full array of charts on a daily basis. Between the two groups, we admit to setting our sights high, but it’s all worthwhile when the numbers come back positive, and we can treat ourselves to a friendly game of backgammon and a chilly little bourbon at day’s end.
Speaking of a chilly little bourbon, it turns out that the distillers are right now due for a pop – as we read the tea leaves.
An Invitation to Sin
Truth is, sin stocks never go out of fashion, whether its tobacco, booze, casinos, sugar, or, of late, marijuana stocks – the lesson is nearly always the same: these stocks are tremendous long term holds.
In fact, in recessions and other crisis periods, you’ll often find that alcohol and cigarette sales receive a fantastic boost.
So, as America frets about (insert your worst worry here) , we thought we’d make a review of some of the leading booze manufacturers, and offer you our take on the best place to funnel some of that Wild Turkey cash you’ve been sitting on.
Until we see a resurgence of the temperance movement, this investment has spirit(s).
There are three big names in the booze quarter that we like, but, unfortunately, none of them have overwhelming fundamental profiles. Either the P/Es are too high, Price to Book is too high, or the yield is too damn low.
The stocks are –
Diageo (NYSE:DEO), the biggest player in the spirits space, with a market cap of $85 billion (and a 2.43% yield – actually, not bad at all). Diageo owns a host of global brand standouts, such as Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness.
Constellation Brands, Inc. (NYSE:STZ) has a market cap of $39 billion and is focused more in the beer and wine space, with brands such as Corona and Robert Mondavi headlining their portfolio. Of the three corporate distillers we’re highlighting today, they have the greatest institutional following, with a full 87% of the company’s shares held by professional managers.
Lastly, Brown-Forman Corporation (NYSE:BF.B), makers of the popular Jack Daniels brands, has a $21 billion market cap, and for our money, also possesses the best long term technical picture – one we hope to sip on today.
But before we get to it, we have a single trade to report.
It was opened on May 8th of this year in a letter called Precious Inversus Correlatus and asked you to consider buying the QQQ September 29th 121 PUT for $1.06 and selling the SLV September 29th 16 PUT for $1.08. Total credit on the trade was $0.02.
Last week, when we saw that the short SLVs were trading perilously close to in-the-money, we advised you to buy them back, take a loss (they were then trading at $0.07) and see what came of the long QQQs.
As it turned out, they expired worthless, and we took a net loss of a nickel.
So it goes.
And now for this week’s trade!
Before we look at a chart of Brown-Forman, just a word on the business.
First off, we mentioned bourbon at the open, and for the record, Jack Daniels – Brown-Forman’s key brand – is not bourbon. It’s ‘Tennessee Whiskey’, and gentlemen and scoundrels alike will let you know there’s a difference. But that’s not for now.
Below is a chart of BF.B stock painted against the S&P 500 for the last decade. That includes the full bull market in stocks that began in March of 2009.
Have a look –
As you can see, the stock returned 180% over the period in question, handily outperforming the broad market by a three-fold measure.
But the real potential for BF.B stock comes when we focus on the performance of the last three years and their recent push into the high end scotch whiskey market.
First the chart –
This is Brown-Forman’s weekly paste-up since March, 2015. Notice in particular the extended range-bound action over the period (in red).
The chart shows several attempts to break above the $56 resistance level, all of which were turned back. But the last four weeks have seen the shares churning in the $55 range, and we believe a break higher is now imminent.
- First, the nearly three year hiatus in price gains has allowed the (weekly) moving averages to catch up to price, generally a prerequisite for further upside to ensue.
- Weekly RSI is also accommodative, with no sign that the stock has gotten ahead of itself (in green).
- And finally, the company’s most recent activity in the acquisition realm puts it in good stead to begin reaping further sales and profits.
We’re referring to Brown-Forman’s purchase of three ultra-premium scotch whiskey brands that the company believes it can ramp up to the next level and roll out to a worldwide cohort of high-end drinkers whose taste for single malt scotch they can satisfy.
And as to that, management has a proven record.
BF.B has raised dividends on the stock for 32 straight years (at a better than 9% annual rate of growth). Over that same period, investors have enjoyed 21.2% annual returns, and the latest acquisitions speak directly to management’s well established strategic acumen.
The high end, single malt market affords them tremendous pricing power, with each of the above woody brands offering a sticker price in the $200 a bottle range!
And for that reason, we’re rolling out the barrel.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew