Alcohol, Tobacco Stocks Are Recession-Resistant, Not Recession-Proof
Alcohol and tobacco will always be controversial investments for obvious reasons, yet they tend to weather recession better than many other stock groups.
Credit their massive cash flow from loyal repeat customers for a resiliency that overshadows their dubious reputations.
No industry, however, can turn a blind eye to 2009 economic trends. These days, consumers of alcoholic beverages are choosing cheaper drinks, while tobacco customers are encountering a higher federal excise tax.
"Alcoholic beverage stocks are recession-resistant, not recession-proof," said
Bars, restaurants and hotels, usually solid channels for alcohol sales, have had fewer customers lately, and more people are buying beverages at the grocery store. They often select beer because a six-pack is cheaper than a bottle of vodka and no mixers are required, said Gilpin.
There's been a shift in beer preferences, with basic -- translate that as cheaper -- considered better.
"Large brewers are doing really well because they have popular value-priced brands," said Gilpin. "The 'craft' brewers are not doing as well because they have higher-priced products and don't enjoy the same economies of scale that can reduce commodity-price pressures."
"I really don't think anyone woke up one morning and decided Keystone Light was their favorite," Gilpin said in explaining why some of those recommendations feature classy spirits. "The trend toward lower-priced choices is simply because people need to stretch their dollars and are worried about job losses, so when the consumer environment improves they'll start trading up again."
A major improvement in profit margins for alcoholic beverage companies is ahead, thanks to a dramatic pullback in the commodity costs of barley and aluminum, said
"With the fastest-growing beer markets now the emerging markets, we are focused on brewers with the most exposure to those markets, and they tend to be based in
"People smoke and drink around the world regardless of what's going on with the economy," said Norton. "We view tobacco and alcohol stocks as defensive, but there are growth opportunities there nonetheless."
Tobacco has managed to survive as a widely held investment despite price increases, ongoing litigation and much-publicized health issues because of its brand loyalty and steady international growth.
"Tobacco companies have some of the best pricing power of any industry and a product that is habitual," Norton said. "Worldwide, there has been an increase in cigarette volume driven by major growth in developing markets, and there have been no price wars among the four international tobacco firms."
Norton's top tobacco stock holdings include
Even though U.S. tobacco sales have been declining at a 3 percent to 5 percent annual rate, firms have thus far been able to compensate by raising prices, he said.
Some analysts have turned cautious on tobacco's outlook. Besides price increases, other concerns are some recent negative legal decisions and stiffer government regulation of the industry through the
"The tobacco industry will last as long as it is legal, but companies will have reduced revenues and will need to manage debt loads and dividend payments accordingly," said
Ralston therefore currently has "sell" recommendations on stock of
Which indicates you can't even depend 100 percent on vice when the economy and government are involved. Recession-resistant is just about the best that investors can expect.
Investing - Alcohol, Tobacco Stocks Are Recession-Resistant, Not Recession-Proof
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