We're buying the recent dip in a beer stock that tends to hold up during tough times

Published Thu, Dec 22 202211:34 AM EST

We're buying 25 shares of Constellation Brands (STZ) at roughly $230.60 each. Following Thursday's trade, the portfolio will own 460 shares of STZ, increasing its weighting to 3.83% from 3.63%. Shares of this beer company best known for its Mexican brands have been weak lately — especially for a defensive stock that has a history of delivering consistent year-over-year growth independent of what's happening in the economy. We see this recent pullback as a buying opportunity. The main reason why Constellation Brands has fallen from the high $250s at the beginning of December to the low $230s in Thursday's trading is due to some softening in recent volume data trends, especially for Modelo Especial, which tends to be the main focus of investors. With the economic picture in the United States cloudy, some people may be concerned about consumers trading down from Constellation's premium alcohol portfolio to cheaper brands. In addition to Modelo, Constellation's portfolio of Mexican beers include Corona, Pacifico and Victoria. In a research note previewing Constellation Brands' upcoming fiscal year third-quarter 2023 earnings report — set for release Thursday, Jan. 5 — RBC Capital came out in defense of the beer maker. While acknowledging the volume slowdown, especially for Modelo, the analysts believe the recent softness in trends has more to do with transitory issues than the underlying health of the beer business. RBC cited such factors like (1) poor weather in California, a region that makes up about one-quarter of the company's volumes; (2) tough year-over-year comparisons at off-premise channels due to the omicron Covid variant last year; (3) pricing growth contributing to volume declines; and (4) a growth acceleration in other brands like Pacifico and Victoria that could have cannibalized some of Modelo's growth. The analysts' bottom line from their note: "We acknowledge slowing volume trends in the near term, but do not believe it changes STZ's ability to deliver 7-9% beer revenue growth in FY2023 and beyond." That's the guidance Constellation put out during its prior quarter. We agree with RBC's analysis. Our thesis all year has been that beer demand tends to be resilient in a macroeconomic slowdown, and we think the risk of trade-down from Constellation's one-of-a-kind Mexican beer portfolio is minimal. Therefore, we think any short-term weakness from transitory factors like weather represents long-term buying opportunities. We also applaud management's recent steps to improve its corporate governance structure. Two recent examples are the elimination of the dual share class structure and the actions to protect the company's earnings from the losses stemming from its investment in Cannabis company Canopy Growth (CGC). Lastly, we believe that Constellation Brands trading at a steep discount to other beverage stocks makes it attractive. (Jim Cramer's Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Trucks with Constellation Brands Inc. Corona and Modelo beer sit during a delivery in the Zona Rosa neighborhood in Mexico City, Mexico.

Susana Gonzalez | Bloomberg | Getty Images