We recently published a list of 12 Best Brewery Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Diageo plc (NYSE:DEO) stands against other best brewery stocks to buy according to hedge funds.
The global alcohol industry is currently grappling with strict regulations, high taxes, inflation, and rising costs, which are likely to persist and may squeeze the profit margins of alcohol producers. The global brewing industry had been hit particularly hard as beer production worldwide fell to 1.88 billion hectoliters last year, representing a YoY decline of 0.9 %.
Peter Hintermeier, Managing Director of BarthHaas, commented:
“After we had managed to post modest growth in 2022 despite unfavorable conditions, we were expecting another small increase in 2023. However, energy, raw materials, packaging, logistics, and labor costs remained at a high level, which put pressure on the brewing business in many countries.”
The American brewing industry is also faced with a declining demand, as beer consumption in the US last year fell to its lowest level since the 1970s, according to the Brewers’ Association. In fact, in 2022, the American spirits industry surpassed beer in revenue for the first time ever. The trend then continued in 2023, driven primarily by the spirits RTD category. Nevertheless, the country’s major brewers were still in good financial health, thanks to rising prices and a consumer shift towards more expensive, often imported beers.
A major factor behind the decreasing demand is also global drinking habits have shifted dramatically over the last few years. The modern consumers are increasingly focused on health and wellness and seek alternatives to traditional alcoholic beverages, giving rise to the rapidly growing low and no-alcohol trend. To make sure they don’t miss out on the opportunity, several industry behemoths have hopped on the zero-alcohol bandwagon and are now offering products with all of the taste and none of the booze.
Despite the aforementioned challenges, the alcohol sector can be an attractive option for investors looking to diversify their portfolios, simply because of the buffer it provides during tough economic times. An analysis by Goldman Sachs has revealed that beer and spirits volumes in the American market have shown little correlation with economic growth. Their sales are more related to the general trends of alcohol consumption per capita rather than the general state of the economy. This is because beer and spirits are often seen as affordable luxuries or even staples.
According to a study by Cambridge University, the decreasing levels of average per capita income lead to very small changes in gross alcohol, wine, and beer consumption. In fact, the surge in unemployment during recessions could instead trigger an increase in the average alcohol intake.
A great example of this is how Americans drank more alcohol during the pandemic and this was also reflected in the resultant imposts collected by the national kitty. Alcohol tax revenues collected by the U.S. Treasury Department rose by 8% in the fiscal year that ended on Sept. 30, 2021, compared to the previous year, and remained well above pre-pandemic levels.
Another popular investment vehicle in the alcohol industry is rare whiskeys. Aptly named ‘Liquid Gold’, this beloved liquor can preserve and even increase in value during economic instabilities, inflationary periods, and recessions. One simply cannot forget about the bottle of The Emerald Isle Collection that sold in auction earlier this year for $2.8 million, or the 1975 cask of Ardbeg single malt which was acquired by a private collector in Asia in 2022 for over $20 million, more than double the amount Glenmorangie paid for the entire Ardbeg distillery and all its stock in 1997.
The Rare Whisky 101 Apex 1000 Index tracks whiskeys that are highly sought after for collection. It has gained over 384% since 2013, against almost 301% gains by S&P’s famous benchmark of the top 500 companies for the same period. The RW Japanese 100 Index, which includes 100 collector’s bottles from Japan, has seen gains of around 350% since 2015. The index includes bottles like Ichiro’s Malt ‘Card’ Ace of Spades, Ace of Diamonds, and King of Hearts, among others.
Methodology
To collect data for this article, we scanned Insider Monkey’s database of 900 hedge funds and picked the top 12 companies operating in the brewing sector with the highest number of hedge fund investors. When two or more companies had the same number of hedge funds investing in them, we ranked them by the revenue of their last financial year instead.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Is Diageo plc (DEO) the Best Brewery Stock to Buy According to Hedge Funds?
A close-up of bottles of whisky and other alcoholic beverages from a winery.
Diageo plc (NYSE:DEO) is a British multinational alcoholic beverage company with its headquarters in London, England. With a vast array of brands in over 180 countries, Diageo’s competitive edge stems from the sheer breadth of its portfolio in a range of markets around the world. This provides the industry giant with a solid foundation for strategic realignment and a strong buffer against market volatility associated with luxury goods. It also enables it to find opportunities to roll out more accessible product lines or bring innovation to the ‘everyday luxury’ segment.
Moreover, Diageo plc (NYSE:DEO)’s evolving strategy revolves around pivoting away from its ‘affordable luxury’ narrative towards a more conventional staples business model, demonstrating that the company has been adapting to broader industry trends, favoring stability and consistent performance over the potential volatility of luxury markets.
Diageo plc (NYSE:DEO) has very strategically kept up with the rapidly growing non-alcoholic trend. Its Guinness 0.0 brand has achieved massive success in only four years since its launch and is already counted among the Best-Selling Non-Alcoholic Beers in the US. In fact, the NA offering has witnessed an almost 50% increase in sales between the end of February 2023 and the end of February 2024, according to Food Manufacture. The company has also recently acquired Ritual Zero Proof Non-Alcoholic Spirits, the bestselling booze-free spirits brand in America.
However, Diageo plc (NYSE:DEO) could be among the companies that stand to lose when Donald Trump takes office next month. The President-elect has stated that he intends to slap 25% tariffs on imports from Mexico and Diageo subsidiaries shipped over 25 million liters of tequila from Mexico to the US last year, including brands such as Don Julio, Casamigos, etc. The spirits-maker relies heavily on tequila for sales growth in the US and the rumored upcoming tariffs could pose a significant problem.
That said, Diageo plc (NYSE:DEO) is a gigantic multinational firm that enjoys a robust financial position with more than $20 billion in revenues for the past couple of years. Moreover, Diageo plc (DEO) is also one of the Best Alcohol Stocks for Dividends, as the company stood up to its reputation as a very reliable dividend payer for decades and increased its full-year dividend by 5%, maintaining its track record of dividend increases since fiscal year 2000.
“Headquartered in London, England, Diageo plc (NYSE:DEO) is a global leader in the alcoholic beverages industry. The company has a vast portfolio of over 200 well-recognized premium spirits (~80% of FY 2024 sales), beers (~15% and mostly Guinness) and other beverages (~5%) that are sold in nearly 180 countries. Led by its Johnnie Walker brand, Diageo is the world’s largest exporter of Scotch whiskey—its largest category at ~25% of sales—followed by other spirits such as tequila and vodka (~10% each). Diageo also owns a ~34% stake in the premium champagne and cognac maker Moët Hennessy (a subsidiary of LVMH Moët Hennessy Louis Vuitton).
Overall, DEO ranks 8th on our list of best brewery stocks to buy according to hedge funds. While we acknowledge the potential for DEO to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
