A Toast to Alcoholic-Beverage Stocks

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Distillers & Vintners index vs. S&P 1500

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While support behind brand investments will likely continue, S&P sees profits from spirits benefiting from pricing power and strong demand.

Despite a possible stabilization in wine prices as grape costs begin to recover, Kwon thinks wine volumes will rise moderately, driven by increased off-premises consumption. She projects further competitive pressures from imported wines from Australia, Spain, and Chile. S&P sees stabilization in grape costs and higher interest expense partially offsetting likely price recovery and improved cost structures from consolidation.

A Continuation of Consolidation Ahead

Given the trend toward moderation in the highly developed markets of the U.S. and Western Europe for distilled spirits products, many of the leading U.S. alcoholic beverage companies have diversified their operations in recent years, both geographically and by product line. Longer term, Kwon believes U.S. alcoholic beverage demand will rise, with most of the growth generated from new product activity and penetration into developing regions abroad. She believes the likely outcome of these trends will be a continuation of consolidation for the global alcoholic beverage group, as companies look to build economies of scale and global capabilities, as well as improve pricing flexibility.

So, there you have it. The group's rising relative strength, combined with a positive fundamental outlook, supports our view that equity prices will continue to be near-term market outperformers. Of the companies mentioned in this article, Brown-Forman is ranked 4 STARS, while Constellation carries a 3 STARS ranking.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Stovall, the chief investment strategist for Standard & Poor's Equity Research Services, is the author of the forthcoming book The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market.