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Is Trouble Brewing for Constellation Brands?

Constellation Brands (STZ) is the company responsible for many of our favorite alcohol brands, including Corona, Svedka Vodka, and Clos du Bios wine. [Disclosure: I own Constellation Brands.]

A growth stock in the consumer staples industry, it has been a favorite of many investors, including CNBC’s Jim Cramer, for many years. Momentum traders like it because it trades like high-growth names like Facebook. Technical analysts love the stock because it trades in a very predictable manner.

Usually, it’s hard to pick a bad entry point into the position. However, it has recently taken a rare stutter-step to the downside. Does that mean it’s time to buy the dip?

Here are some statistics you need to know:

  • Credit Rating: BB (Non-investment speculative grade)
  • Debt / Equity Ratio vs. Industry Average: 1.00 / 1.15
  • Leverage vs. Industry Average: 2.49 / 2.65
  • Market Capitalization: 27.80 Billion
  • Earnings Per Share (Current): 5.05
  • Dividend: $0.31
  • Beta: 0.83
  • Return on Equity vs. Industry Average: 16.92 / 20.62
  • P/E Ratio (Current) vs. Industry Average: 27.62 / 21.69
  • Free Cash Flow: $69.50 Million
  • Price / Cash Flow vs. Industry Average: 19.92 / 19.53

In the current market conditions, credit rating has become increasingly important for equities even though stockholders aren’t buying bonds. Many people are forecasting a recession (and I agree with those people). During an economic downturn, many equities lose value and then have a hard time raising cash. (If you don’t believe me, just look at the oil stocks.) Constellation Brands’ credit rating is bad, and issuing debt could be expensive. However, it is very unlikely that Constellation Brands will need to raise cash. Their dividend is definitely sustainable, and they have a strong balance sheet with $3.5 billion in current assets to cover $888 million in current liabilities.

With a P/E Ratio of almost 28 times earnings, it is an expensive stock. Investors are currently fleeing growth stocks in favor of value, so it might see a bit more selling, but alcohol is usually an industry that sees increased sales during recessions, so I think the stock will grow into its valuation.

Technical analysts are probably buying the stock right now.

Constellation Brands chart

The above chart shows us a sold and definitive drop in price that quickly rebounded once it hit the multi-year support level. That’s good. The last time the stock hit this support level was in the August sell-off, which would lead a technician to value this pullback as a buying opportunity. However, with the RSI below 50 (the current value is 44.88) and the negative MACD, there is an obvious downward momentum to the stock that hasn’t been this deep or endured for this length of time in many months. That’s enough to keep a technician watching the stock daily instead of occasionally as they probably did before.

The stock’s break below a wedge formation that was forming as an intermediary trend shows that it might be headed back down to test that support level. Incidentally, if it breaks below support, technicians would become sellers, but if it bounces back, they’ll be buying more shares. Interestingly, a fundamental investor would prefer the name if it sells off below support because its P/E ratio would be more appealing.


In summary:

A bearish fundamental investor looking for safety in this volatile market might find it more comfortable to wait for a further pullback or invest in Anheuser-Busch ($BUD), which trades at a much more reasonable P/E of 20.16 and pays a much larger dividend. But a bull might see this temporary weakness in Constellation Brands as an opportunity to load up on as many shares as their money can buy and wait for the growth stock to continue its magic.


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J Rae has been interested in finance since age eight when her grandfather, who started investing in the 40s, started coaching her. She has been an investor since 2006 and a trader since 2013 and focuses on a diversified portfolio of stocks and options. J Rae has almost completed an MBA in Financial Management.

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