Beer drinkers are keeping their mugs full even as the economy heads south and Wall Street suffers week after week.
Market veterans say beer stocks and other so-called sin stocks outperform the market during periods of economic downturn because people continue drinking and smoking as much as they keep buying consumer staples such as soap and toilet paper.
For instance, shares in many beer companies have performed much better than the overall market during the past year, most notably Anheuser-Busch Cos. Inc. (BUD). The St. Louis-based company's stock was up more than 30% for the year as of last Thursday, trading at $64.85 a share.
In July, the company agreed to a $52 billion takeover by Brussels, Belgium-based InBev SA.
The Boston Beer Co. Inc. (SAM), Sam Adams' producer, was holding steady at about $46 a share, exactly where it was a year earlier.
Similarly, Denver-based Molson Coors Brewing Co. (TAP) shares were down about 5% for the year to $46.50.
GOOD RELATIVE RETURNS
Normally, a year of zero returns wouldn't be notable. However, considering that the Standard & Poor's 500 stock index was down almost 28% from a year ago, beer stocks are a bright spot.
The current financial turmoil, however, has proved more challenging for some "vice" industry sectors.
"This environment may especially benefit beer companies," said Erin Smith, an analyst with New York independent-research firm Argus Research Co. Buying trends suggest that people who drink alcohol are choosing cheaper alcoholic beverages over wine and hard liquor, she said.
Some alcohol sellers, such as Fortune Brands Inc. (FO), have suffered as drinkers choose subpremium beers over spirits such as its Jim Beam bourbon, Ms. Smith said. Deerfield, Ill.-based Fortune Brands last Thursday was trading at $53.80, down 32.8% from a year ago. At that price, the company is undervalued even though it continues to face the threat of consumers' "trading down," she said.
Another vice industry with a history of being
recession-resistant — but not this year — is gaming. "No gaming analyst saw it coming," said Dan Ahrens, portfolio manager of the Ladenburg Thalmann Gaming and Casino Fund (GACFX), from Ladenburg Thalmann & Co. Inc. of Miami. "But it's easy to see in hindsight."
Casino operators such as MGM Mirage (MGM) and Wynn Resorts Ltd. (WYNN) depend on non-gaming revenue for much more of their revenue than they have during past periods of economic decline, Mr. Ahrens said.
As spending on food and beverages has fallen because consumers are hurt by higher gasoline prices and lower real estate values, gambling stocks have been hit, he said.
Over the last year, Las Vegas-based MGM Mirage fell 74% to $23.56 a share; Wynn Resorts, also of Las Vegas, declined 53% to $73.84 a share; and Mr. Ahrens' gambling fund dropped 59% to $4.97 a share.
"We need stability in oil prices before discretionary spending will increase," he said.
Gambling stock performance has hurt the results of a fund aimed at capturing profits from vice sectors that were supposed to be
recession-resistant.
The $143 million Dallas-based Vice Fund (VICEX), which is focused on gaming, alcohol, tobacco and aerospace/defense, fell almost 29% over the past 12 months, to $16.66 a share.
Shares of defense and tobacco companies have held up pretty well over the past year, falling less than the overall market, said Mr. Ahrens, author of "Investing in Vice" (St. Martin's Press, 2004). Reynolds American Inc. (RAI) of Winston-Salem, N.C., for example, fell 15% from a year ago to $48.46.
STRONG FUNDAMENTALS
Many financial professionals are focusing on companies with strong fundamentals.
Michael Martin, chief investment officer for advisory firm Financial Advantage Inc. of Columbia, Md., which manages $250 million, recommends avoiding broad indexes such as the S&P 500.
"The business environment is real different than it has been over the past 20 years," he said, explaining that weak are sorted from the strong, "and if you own them all, it's not going to pay off."
It's a time to own individual stocks or funds that are focused on a small number of companies, Mr. Martin said.
At Financial Advantage, advisers invest in companies with a story they like, and if the price rises by 20%, they cut their allocation "and say, 'Thank you,'" he said.
If the price declines by 20%, "we buy more shares," Mr. Martin said.
