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Sober Up: The American Beer Market is Flat

Constellation Brands (NYSE:$STZ) shot up 37% yesterday and Anheuser-Busch InBev (NYSE:$BUD) rose a not-too-shabby 5% on speculation that the U.S. Department of Justice might let AB Inbev acquire  Grupo Modelo (Pink:GPMCF) after a few small revisions to the deal were made.

The Department of Justice torpedoed the original deal last month on fears that it would give AB Inbev nearly half the U.S. market and the monopoly pricing power that would come with it.

This is a big deal for Constellation for the reasons I gave earlier this month: Whisky and Beer Still Better Long-Term Bets than Wine.

Getting access to Modelo’s highly-recognizable brands like Corona and Negro Modelo is good for Constellation’s long-term future.  But investors need to sober up: the U.S. beer market is flatter than a week-old keg of Budweiser.

American domestic beer sales rose slightly in 2012 after falling for three straight years.  And within the domestic beer space, the growth is in high-end microbrews.  The big beer brands you are used to seeing in Superbowl commercials—such as AB InBev’s Bud Light or Molson Coors’ (NYSE:$TAP) Coors Light—are having a hard time getting the attention of drinkers.

Part of this is due to a bad economy; young blue-collar men got hit worse than anyone in the Great Recession.  But a bigger issue—and one that won’t improve with a recovering economy—is changing demographics.  The Baby Boomers are well past the heavy drinking stage of life, and Generation Y (made up of current 20-somethings and early 30-somethings) tends to prefer flavored cocktails over beer.

Generation X—my generation—still likes a good beer.  But we’re a small lot and we prefer microbrews when we can get them.

Big Beer knows that the domestic market is dead, which is why AB InBev, SABMiller (Pink: SBMRY) and Heineken (Pink:HEINY) have gone on an emerging market buying spree over the past decade.

AB Inbev has the best brand portfolio in Latin America, but the best growth potential today is in Africa, where SABMiller and Heineken are the best-positioned.  This was my rationale for recommending Heineken in the Sizemore Investment Letter and why I continue to hold it today.  Heineken already gets more than a fifth of its profits from Africa, and SABMiller gets well over a third.  This will only rise as African living standards continue to improve.

So, if you buy beer stocks, make sure you’re buying for the right reasons.  The large mega brewers are long-term plays on the rise of the emerging market consumer.  Just don’t expect too much from the domestic American market.

And on that note, I’m off to crack open a Shiner Bock, which is, alas, not a publicly-traded company.

Disclosures: Sizemore Capital is long HEINY.

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Investing in Those Elusive Chinese Consumers

China’s slowdown looks to have bottomed out, at least for now. Third-quarter GDP grew by 7.4% , the lowest rate in three years, but in line with what economists were expecting.

But most encouraging was the news that Chinese retail sales saw growth that was nearly double that figure at 14.4%.

I’m not the biggest fan of China’s “managed capitalism,” and, eventually, I believe that this model will reach the end of its road. In one critical aspect, it already has. China’s leaders have stated it is their goal to make China’s economy more “balanced,” meaning less dependent on exports and investment and more focused on domestic consumer spending.

But whether Beijing desires it or not, I believe this transformation would be happening anyway. As China’s middle classes expand and adopt acquisitive Western lifestyles, it is inevitable that their economic clout will be felt.

Ah, the elusive Chinese consumer. Just hearing him mentioned is enough to trigger a Pavlovian dog response in investors. But getting real access to him has proved to be difficult.

Consider that familiar consumer staple we know and love: beer. I have been a consistent advocate of global “Big Beer” as a play on rising consumer incomes. Heineken (HINKYis a favored long-term holding of my Covestor Sizemore Investment Letter portfolio , and I have also written favorably about Anheuser-Busch InBev ($BUD). Both of these megabrewers have excellent exposure to the growing — and beer swilling — emerging market middle class.

But what about Chinese brewer Tsingtao Brewery (TSGTF)? It is, after all, the best pure play on Chinese beer consumption. Unfortunately, it is also too expensive to be taken seriously. Investors wanting access to Chinese beer drinkers have bid the shares up to 25 times earnings and to a dividend yield of less than 1% (as of 10/22).

Chinese Web browser Baidu ($BIDU) is also a bit on the pricey side at 29 times earnings, a valuation I might have expected to see 12 years ago. China Mobile ($CHL) remains attractively priced and pays a respectable 3.5% in dividend yield (as of 10/22).

Otherwise, it is a real struggle to find Chinese stocks with decent liquidity that cater to the country’s domestic consumers.

Instead, I continue to be a fan of the indirect approach, finding American and European companies with high exposure to China. Luxury goods stocks have been a good fit, and most have sold off, or at least traded sideways, in recent months due to fears that China’s slowdown would hit sales.

With China looking to be turning a corner, luxury firms will likely have a nice finish to 2012. One that I particularly like is the British Burberry (BURBY) . Burberry lost a quarter of its value last month on fears that its sales in China were slowing worse than expected. Shares have recovered about half of those losses in the weeks that followed, but expectations for the company are mixed.

Should Chinese luxury spending recover even slightly — and I expect that it will do much better than that — I expect Burberry to enjoy a nice multi-month rally.

This article first appeared on MarketWatch.

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Beer Stocks: The Keg Party is in Emerging Markets

Back in April, I wrote favorably about Molson Coors ($TAP) (see “Beer Stocks: Crack One Open”), noting that the brewer was significantly cheaper than Anheuser Busch InBev ($BUD) and SABMiller (SBMRY) and that it paid the best dividend of any major brewer.  At 3.1%, its dividend yield at the time was nearly double that of Anheuser Busch InBev.

Since then, Molson Coors is up a modest 10%, more or less in line with the S&P 500.  Meanwhile, BUD has rallied by more than 20%.

But looking longer term, we see an even starker contrast.  Since the beginning of 2010, Molson Coors has trailed its “Big Beer” peers by a wide margin.  Anheuser Busch InBev, SABMiller and Heineken (HINKY) are up 66%, 50%, and 30%, respectively.

But Molson Coors?

TAP has been flatter than a three-week-old keg, actually showing a slight loss over the past two years.

So, what gives?  What explains the lack of investor interest in Molson Coors?

It’s really quite simple.  Molson Coors missed the party in emerging markets.

Prior to its June acquisition of Eastern European brewery StarBev, Molson Coors had negligible exposure to emerging markets.  Its business was limited almost exclusively to North America and the UK, where beer brewing is a slow-growth business.  And outside of its trendy Blue Moon brand, Molson Coors had also largely missed out on the one promising growth outlet for the North American market: upscale premium microbrews.

The company found itself selling low-margin, mass-market beer to an aging and shrinking North American and British market.  Molson Coors faced relentless competition from both Budweiser and Miller at the mass-market level, and from innumerable up-and-coming foreign and premium brands at the higher end.  Not the sort of scenario that would make investors thirsty for more.

Even after the StarBev merger, Molson Coors will only sell about 14% of its volumes outside of North America and the UK.

Meanwhile, take a look at BUD.  Anheuser Busch InBev sells more beer in Latin America (34% of volumes) than it does in North America (32% of volumes).  Overall, emerging markets make up more than half of all beer sold.

And BUD isn’t even the best positioned of the group.  Heineken is a long-term recommendation of the Sizemore Investment Letter precisely because of its exposure to emerging markets and specifically to Africa, the next great growth market.  Heineken gets 21% of its profits from Africa already, and this figure is set to skyrocket as African incomes rise and millions of Africans join the ranks of the middle classes.  Rival SABMiller is also a major player in Africa, and particularly in South Africa.

Heineken also made a major expansion into Southeast Asia this year with its purchase of Asia Pacific Breweries.

So, where does all of this leave Molson Coors?

With the global beer market already well on its way to consolidation, there are not a lot of attractive acquisition targets left to snag, and those that do come up are not likely to go cheaply.  Realistically, Molson Coors will be primarily a North American seller of suds for the foreseeable future.

This isn’t all bad.   While the Echo Boomers—the large generation of Americans in their 20s and very early 30s—do not slosh the stuff as enthusiastically as previous generations (they tend to prefer vodka-based mixed drinks), there are signs of life in the domestic market.  U.S. beer shipments are actually up this year, after falling slightly for the past three years in a row.  Mass-market brewing may no longer be a growth business in the United States and Canada, but it is generally pretty stable.  We don’t have to worry about any of the major brewers facing financial distress any time soon.

Looking at Molson Coors’ financials, I continue to believe the stock has value as a cheap income stock.  TAP trades for just 11 times expected 2013 earnings and pays a dividend of 2.9 percent—the highest of all major beer brewers.  This isn’t a “home run” stock, but it’s one that is priced to offer decent returns going forward.

Bottom line: If you want growth, Heineken remains my favorite brewer.  But I consider Molson Coors a worthwhile choice for a long-term dividend-focused portfolio.

This article first appeared on InvestorPlace.  Sizemore Capital is long HINKY.

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Investment Insights from a Peruvian Beach

The problem with taking a vacation is that, alas, you eventually have to come home. And given the ubiquity of smart phones and wifi access, you’re never really “away” to begin with.

This is good and bad, of course. When you have capital at risk, you need to be able to trade in a hurry if events take an unexpected turn. This is particularly true if you manage money for others; clients have to know that their advisor is keeping an eye on their accounts even if he is desperately trying to relax in his beachside cabana with a cigar and a mojito.

Which is, incidentally, how I spent the better part of last week. The wife and I dropped off our two year old with the inlaws and made a quick getaway to a secluded resort on Peru’s northern coast near Mancora.

Or at least it used to be secluded. A short walk down the beach was a brand new (and much larger) resort, and business was booming.

If you’ve never heard of Mancora and have never considered Peru as a beach destination, there is a reason. As beautiful as it is, it’s not particularly easy (or cheap) to get to for Americans or Europeans, and Peru lacks the internationally-recognized beach culture of, say, Brazil or Mexico.

Hemingway in Peru

There are plenty of gringos in Peru, of course. But most of them are backpacking around Machu Picchu or experimenting with Andean mysticism in a drug-induced haze. Outside of a few die-hard surfers and marlin fishermen, coastal Peru caters almost exclusively to Peruvians (Though for the history buffs out there, I’ll point out that Ernest Hemingway was well aware of northern Peru’s charms and even filmed the movie version of The Old Man and the Sea from Cabo Blanco, a small fishing village about 20 miles from Mancora.)

All of this brings me to the point of this article. Unlike many resorts in the tropics, Peru’s beach resorts tend to attract the country’s native citizens. And as incomes rise in Peru and more and more middle- and upper-class Peruvians enjoy the disposable income for a beach holiday, coastal Peru is enjoying quite a boom. Prices at the nicer resorts start at around $100 per person per night, which is no small sum of money in a developing country. And prices have continued to rise even as the number of beds available has exploded.

The same can be said of urban Lima. As demand for upscale apartments in the trendy Miraflores and San Isidro districts has far outstripped supply, construction has spilled over into neighboring districts. And in Trujillo, the northern city where my inlaws live, the rate of new construction is such that I hardly recognize the place each time I visit.

The rise of Peru’s middle classes—and of their contemporaries across the developing world—is real. The question is how we can profit from it as investors.

Most emerging market funds and ETFs tend to be heavily weighted in resource companies and banks that lend to resource companies—hardly the kind of exposure we are looking for. Emerging Global Advisors has taken a big step towards remedying this with its popular Emerging Market Consumer ETF ($ECON) and Emerging Market Domestic Demand ETF ($EMDD), both of which invest exclusively in emerging-market companies with exposure to domestic consumers. I believe both ETFs are good candidates for the emerging-market allocation of your portfolio.

Another approach I like is getting access to emerging-market consumers indirectly through the shares of attractively-priced American and European companies that get a large percentage of their sales from emerging markets. Companies like Dutch megabrewer Heineken ($HINKY) and Anglo-Dutch consumer products company Unilever ($UL) would certainly fit the bill.

As I wrote in early August, emerging markets are attractively priced and, for the most part, out of favor. This would seem to me to be a fine time to “risk up” by adding a little more emerging market exposure to your portfolio.

Oh, and if you feel like doing a little primary research, northern Peru is pleasant this time of year.

Disclosures: Sizemore Capital is long ECON, HINKY and UL. This article first appeared on MarketWatch.

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