As noted by major Wall Street houses of late, the odds of a US (and possibly global) recession have jumped over recent weeks as the Federal Reserve makes plain its plans to undermine aggregate demand through monetary policy tightening to ultimately battle the inflation genie, which appears to have escaped the bottle over the past few months, putting the Fed in the uncomfortable position of being behind the proverbial curve. (1)
As we know, genies are hard to put back in the bottle once they escape.
Even the World Bank president has said, “As we look at the global GDP … it’s hard right now to see how we avoid a recession.” (2)
So, where should investors turn in this situation?
One tried and true strategy when the global economy is on the verge of recession is the “Gambling, tobacco, and alcohol” strategy, also known as the Vice portfolio. People continue to embrace their vices when things turn for the worse. (3)
For investors, the alcohol element of this equation is the easiest and most direct because there are a number of solid companies with strong earnings track records. But there are also some interesting growth plays in the space, as we shall see below.
Constellation Brands Inc. (NYSE:STZ) engages in the production, marketing, and distribution of beer, wine, and spirits. The company operates Beer, Wine and Spirits, and Corporate Operations and Other, and Canopy segments.
The Beer segment includes imported and craft beer brands. The Wine and Spirits segment sells wine brands across all categories-table wine, sparkling wine, and dessert wine-and across all price points. The Corporate Operations and Other segment comprise costs of executive management, corporate development, corporate finance, human resources, internal audit, investor relations, legal, public relations, and information technology. The Canopy segment consists of canopy equity method Investments.
Constellation Brands Inc. (NYSE:STZ) recently announced that it has entered into an accelerated share repurchase (“ASR”) agreement with Bank of America, N.A. to repurchase $500.0 million of its Class A common stock. Under the ASR agreement, Constellation will receive approximately 1.7 million shares on April 8, 2022, representing approximately 80% of the expected share repurchases under the ASR agreement, based on the company’s April 6, 2022 closing stock price of $231.81. The repurchased shares will become treasury shares. (4)
According to its release, the specific number of shares to be repurchased in the transaction is generally based upon the volume-weighted-average price of the Common Stock during the term of the ASR agreement, less a discount and is expected to be completed no later than May 2022. The purchase price for shares repurchased in the accelerated share repurchase transaction will be paid primarily with cash on hand and will be completed under the company’s current share repurchase authorization, which currently has approximately $2.6 billion in authorization remaining before giving effect to the ASR.
The context for this announcement is a bit of a bid, with shares acting well over the past five days, up about 3% in that timeframe.
Constellation Brands Inc. (NYSE:STZ) managed to rope in revenues totaling $2.1B in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 7.7%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($199.4M against $2.7B, respectively).
1812 Brewing Co. Inc. (OTC US:KEGS) bills itself as an operator of and investor in companies in the craft beer industry. From 2005 to 2021 the Craft Beer industry grew by more than 300%. The Craft Beer industry continues to grow faster than the economy with growth anticipated to outpace US economic growth by 100% over the next five years. The beer industry writ-large is extremely recession-resistant, as per capita alcohol consumption rarely abates and has even increased during difficult economic times. The Craft Beer industry is highly fragmented, with over 8,000 craft breweries nation-wide. Any players looking to consolidate the industry will have that opportunity.
KEGS significantly expanded 1812 Brewing’s production capacity. When KEGS moved 1812 Brewing’s original brewing equipment, with equipment additions we increased its production capacity by 83% immediately. Shortly thereafter and by participating in a series of auctions in Milwaukee, WI and Detroit, MI, along with some new asset acquisitions, we opportunistically acquired a second brewing system over 4.2 times larger than 1812 Brewing’s original system along with additional fermentation tanks, and KEGS increased 1812 Brewing’s production capacity by almost 1,000%. Basically, the company is working to become an “incubator” of growth for its holdings in the spirits industry.
1812 Brewing Co. Inc. (OTC US:KEGS) most recently announced that it has engaged elite Boston, MA-based investment bank Tully & Holland Incorporated to assist KEGS’ efforts to pursue a strategic acquisition or acquisitions in the craft brewing industry.
According to the release, specifically, Tully & Holland’s (www.tullyandholland.com) efforts on behalf of the Company will consist of the creation of a target list of craft breweries, which it will research and analyze as potential acquisitions. And with available funding, the Bank will approach and negotiate potential terms of acquisitions with the specific candidates that the Company so wishes.
“This Bank is absolutely the right choice for us,” stated Mr. Scozzafava. “Since 1992, they have been focused on serving consumer businesses, and its financial expertise in combination with its deep industry experience enables them to better serve the goals of the Company. Tully & Holland has represented both sellers and acquirors in transactions of all sizes. And importantly, they have an expertise in consumer beverages – including having participated in multiple transactions involving microbreweries.” (5)
1812 Brewing has successfully moved its legacy brewing operations from its Sackets Harbor, NY restaurant to a company-owned 13,000 square foot facility in the City of Watertown’s Industrial Center. The site, on over 2 acres of property, give the Company ample room for production and growth for years to come.
1812 Brewing Co. Inc. (OTC US:KEGS) appears to be in deep-discount territory, with shares down 90% from their highs earlier this year. That looks brutal, but it also suggests that the speculative money has already been expunged from the stock, offering new investors an opportunity to get involved in what may be bargain basement levels, especially as the company starts to ramp up its acquisition-based strategy, which represents a likely fountainhead of upcoming catalysts to liven the tape.
Boston Beer Co. (NYSE:SAM) bills itself as a company that engages in the production of alcoholic beverages.
The company’s brands include Truly Hard Seltzer, Twisted Tea, Samuel Adams, Angry Orchard, Hard Cider and Dogfish Head Craft Brewery. Boston Beer produces alcohol beverages, including hard seltzer, malt beverages, and hard cider at company-owned breweries and its cidery, and under contract arrangements at other brewery locations.
Boston Beer Co. (NYSE:SAM) recently announced, along with Entourage Health Corp. (TSX-V:ENTG) (OTCQX:ETRGF), the Canadian debut of ‘TeaPot’, a new line of cannabis-infused iced tea beverages. Developed and formulated alongside Boston Beer’s cannabis subsidiary BBCCC Inc., and Windsor-based Peak Processing Solutions, TeaPot is BBC’s first infused beverage offering which will be available in select Canadian provinces commencing July 2022. (6)
“We congratulate our partners at The Boston Beer Company on the exciting launch of TeaPot – a unique iced tea crafted with natural flavours and infused with our most distinguished cultivars that we expect will land as the best cannabis-infused beverages in Canada,” said George Scorsis, CEO and Executive Chairman, Entourage. “The BBC team has a storied history and pedigree for producing some of the most beloved craft beverages in North America and we’re thrilled to be introducing yet another consumption method for the canna-curious consumer and growing self-care market. Together, our consumer-savvy, quality-driven approach to product development has made for a complementary collaboration alongside Peak, our processing and bottling partner, ensuring every beverage is prepared with the highest care and excellence. TeaPot will be an instant hit this summer as it debuts in select provinces starting in July, with eventual nationwide distribution expected throughout the year.”
Moreover, the name has registered increased average transaction volume recently, with the past month seeing 3% over what the stock has registered over the longer term. It pays to take note of this fact with a float in play that’s very limited — of 9.5M shares. As savvy traders are well aware, a mechanically driven price squeeze can result from this type of mix of small float and ramping attention from traders.
Boston Beer Co. (NYSE:SAM) has a significant war chest ($15.8M) of cash on the books, which must be weighed relative to about $245.5M in total current liabilities. SAM is pulling in trailing 12-month revenues of $1.9B. However, the company is seeing declines on the top-line on a quarterly y/y basis, with revenues falling at -21.1%.
Other key players in the spirits and alcohol space include Diageo PLC ADR (NYSE:DEO), Brown-Forman Corp. (NYSE:BF.B), Molson Coors Beverage Co. (NYSE:TAP), and LVMH Moet Hennessy Louis Vuitton ADR (OTC US:LVMUY).