Berkshire Hathaway's latest 13F filing shows that in Q1, it significantly raised its stake in Constellation Brands -- a stock that has not fared well over the last five years.
Berkshire CEO Warren Buffett is arguably the greatest value investor of all time.
This move appears to be following a playbook that Buffett and Berkshire have used many times.
While Warren Buffett has been willing to adapt to changes in the stock market, he will always at his core be a value investor. Value investing is based on a simple-sounding premise: Buy stocks that are trading at less than their intrinsic value.
Yet in practice, value investing is incredibly difficult. Investors need to determine what a company's intrinsic value really is, then game out what kind of valuation multiples the market might assign it if the company can attain that value. Often, investments that look like value stocks turn out to be value traps. In other cases, it can take a long time for the market to notice that it has been underpricing a company.
Buffett is arguably the best value investor of all time, so when his company, Berkshire Hathaway purchases a stock, the market pays attention. Recently, the billionaire has been pounding the table on a stock that has been struggling for a few years. Does Buffett know something that Wall Street doesn't?
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Investing in the struggling alcohol sector
In the fourth quarter of 2024, Buffett and his team at Berkshire initiated a position in Constellation Brands(NYSE: STZ) -- a major purveyor of premium beer, wine, and spirits -- purchasing more than 5.6 million shares valued at about $1.2 billion. In the first quarter of 2025, Berkshire's recent filings from the Securities and Exchange Commission reveal, the conglomerate increased that position by 114%.
Constellation hasn't performed well in recent years. The stock is down more than 14% this year and has only risen about 20% over the last five years (as of May 15), significantly underperforming the broader market.
Constellation owns popular beer brands like Modelo, Corona Extra, and Pacifico, as well as popular wine brands like Kim Crawford's and liquor companies like Casa Noble Tequila.
The traditional alcohol space has been facing challenging times of late, as consumers are drinking less, choosing lower-priced brands, and turning to healthier alternatives. Meanwhile, today's younger adults, as a cohort, are less apt to drink than the generations that came before them. As a result, alcohol sales across the board have struggled in recent years.
And lately, investors have been worried about the impact Constellation faces from President Donald Trump's tariffs. Earlier this year, Trump imposed steep tariffs on Mexico, from which Constellation imports much of its beer. Trump has also slapped a 25% tariff on aluminum -- the material beer cans are made from.
The combination of all those added costs and headwinds led Constellation management to lower its guidance in early April. After generating adjusted earnings per share (EPS) of $13.78 in its fiscal 2025 (which ended Feb. 28), management guided for EPS of only $12.75 at the midpoint of its range for fiscal 2026, and also forecast lower sales. Trump has delayed imposing many of his threatened tariffs on Mexico; however, the 25% aluminum tariff is in effect.
Following the Buffett playbook
Constellation has many attributes that Buffett likes. The company owns some of the most iconic beer brands in the world. Corona Extra and Modelo likely have staying power and therefore some level of pricing power. Additionally, this isn't the first time Buffett and his team have invested in what some might consider an antiquated industry.
Berkshire owns a lot of energy assets and has now taken huge stakes in large U.S. oil and natural gas producers Occidental Petroleum and Chevron. Buffett might be thinking that the U.S. and the world will remain a lot more dependent on natural gas and oil than people think, and that energy from greener sources simply may not be enough to meet demand. Or perhaps he thinks these companies have the resources to move into alternative energy sectors and become leaders there, too.
Buffett could be thinking something similar about the alcohol sector. Sure, sales may have slowed in recent years, but at the end of the day, consumers will likely keep drinking, and Constellation has also started investing in non-alcoholic beverages.
At the current share price, the company's dividend has a yield topping 2% and generates solid free cash flow (FCF), with a trailing 12-month FCF yield of 5.6%. Constellation is also planning to repurchase more shares and is guiding for $6 billion to $8 billion of FCF generation from fiscal 2026 through fiscal 2028. With the stock trading at around 15 times expected forward earnings, Buffett and his team clearly think it's too cheap to ignore.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Constellation Brands and Occidental Petroleum. The Motley Fool has a disclosure policy.
