Beer Can Be an Investment
Super investor Jim Rogers advocates buying the biggest brewery in emerging markets, noting in his travels that people around the world enjoy beer.
As CEO of Rogers Holdings, Rogers rarely reports what he is doing. However, he is a frequent market commentator and offers some insight into his trading ideas when speaking with the business press.
Rogers partnered with the legendary George Soros to co-found the Quantum Fund in 1970. Over the next 10 years, the fund gained 4,200 percent.
In the same period, the S&P returned 47 percent. In 1980, a rich man, Rogers decided to retire and travel the world by motorcycle, later subject of two best-selling books.
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Beer and More in One Investment
Constellation Brands, Inc., (NYSE: STZ) produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy.
Source: Constellation Brands
The company sells wine across various categories and include the Black Box, Clos du Bois, Estancia, Franciscan Estate, Inniskillin, Kim Crawford, Mark West, Meiomi, Mount Veeder, Nobilo, Robert Mondavi, Ruffino, Saved, Simi, The Dreaming Tree, The Prisoner, Charles Smith, and Wild Horse brands
It offers beer primarily under the Corona Extra, Corona Light, Modelo Especial, Modelo Negra, and Pacifico brands.
For the second year in a row, the fastest growing beer in America is Modelo Especial with domestic shipments increasing by 133.3% from 2011 to 2016. The country’s growing Hispanic population may be one reason for the immense growth of Mexican lagers like Modelo, Dos Equis, and Corona in recent years, according to experts.
Modelo Especial’s roots lie in Mexico, with the first batch brewed in 1925. Analysts also cited the fact that engaging advertisements make a significant impact on the success of a beer brand. Constellation Brands spent $48.9 million on the marketing of Modelo in 2015, a 34.4% increase from 2014.
The Mexican lager Corona is one of many imports from Mexico that have been performing very well, as far as sales go, in the past several years in the U.S. Corona began production in 1925, and is now parent company Constellation Brands’ top selling import brand in the United States.
Eric Shepherd, executive editor at Beer Marketer’s Insights, suggests the increased popularity of the Corona Extra is likely due to the country’s ever-growing Hispanic population and the owner’s marketing campaigns.
In 2015, Constellation Brands spent $426.1 million on advertising — up from $361.1 million the previous year. About 30% — $125.8 million — of Constellation’s 2015 advertising spending went towards the Corona brand.
According to Constellation Brands, Corona Light is the top selling imported light beer in the United States. It’s not as popular as Corona Extra, which shipped 8.6 million barrels in the U.S. in 2016. But, Constellation Brands sold 1.2 million barrels of the lower-calorie Corona Light in 2016, a 26.8% increase over 2011.
Most mainstream brands are not among the fastest growing beers largely due to a growing preference to more expensive craft crews. However, Constellation Brands is an exception with both Corona and Modelo ranking among the top 10 fastest growing beer brands in the country.
Spirits are sold under the SVEDKA vodka, Black Velvet Canadian whisky, Casa Noble tequila, High West craft whisky brands.
A Recent Expansion Into a Hot Sector
The company is also one of the few large companies with a presence in the marijuana industry. In October, the company announced that it had agreed to take a 9.9% minority stake in the $2 billion Canadian medical marijuana company Canopy Growth.
The stake was worth about $191 million at the time of the acquisition, though Constellation will have the option of purchasing additional stakes in the future. This is a fast growing industry with potential for a large company to profit from.
Using Canopy’s expertise, Constellation is attempting to create cannabis-infused drinks, the Wall Street Journal reported after an interview with Constellation’s CEO.
“Canopy Growth has a seasoned leadership team that understands the legal, regulatory and economic landscape for an emerging market that is predicted to become a significant consumer category in the future,” said Constellation Brands CEO Rob Sands in a statement. “Our company’s success is the result of our focus on identifying early stage consumer trends, and this is another step in that direction.”
A Strategy to Trade Constellation Brands
STZ is likely to remain in an uptrend for some time given the strength of its core businesses and the growth potential in each of its major products.
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread . The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
For STZ, a bull put spread could be opened with the January 19 put options. This trade can be opened by selling the January 19 $215 put option for about $1.50 and buying the January 19 $210 put for about $0.90.
This trade would result in a credit of $0.60, or $60 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($215 – $210). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $440 ($500 – $60).
The potential gain is about 13.6% of the amount of capital risked. This trade will be for about three weeks and the annualized rate of return provides a significant gain.
Options pricing models show there is a 79% probability of success in this trade.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.