Consumer Sector Ideas

[gfp927z]

>>> Forget marijuana stocks — put your money in booze, nicotine and caffeine instead


By Michael Brush

Oct 4, 2018


https://www.marketwatch.com/story/forget-marijuana-stocks-put-your-money-in-booze-nicotine-and-caffeine-instead-2018-10-04?siteid=yhoof2&yptr=yahoo



Investing in ‘vice’ stocks is a defensive play, and there’s no speculation involved, as is there is with marijuana stocks

The Rat Pack was a big proponent of cigarettes, spirits and coffee.
Investors are tripping over themselves chasing marijuana-related stocks.

The logic of investing in the likes of Tilray TLRY, -1.02% New Age Beverages NBEV, +1.13% Canopy Growth CGC, -0.87% and Cronos Group CRON, -3.91% makes sense, even if the stock prices don’t.


After all, investing early on in a new trend can pay off big. And vice stocks make good investments.

But if you want to invest in vice, I stay stick with the old-school tried-and-true variety. Put your money in booze, nicotine, caffeine and sugar.

Insiders certainly agree with me. Many insiders with great records have been putting their own money into the three vice-related stocks I drill down on below. I just suggested all these names in my stock letter, Brush Up on Stocks, because I think these insiders are on to something.

According to one thoroughly cynical theory in investing, it makes sense to invest in vice stocks because no matter what happens to the economy, people will probably find a way to keep on buying stuff they really enjoy — and may even be addicted to.

At a time when analysts debate whether we are at the end of the cycle, which would suggest the S&P 500 Index SPX, -0.68% and tech-heavy Nasdaq COMP, -1.34% could be topping out, it probably makes sense to move some money to defensive plays. To me, these vice companies are super-defensive plays. Because if the economy gets really bad, people may even use more of their products.

Indeed, insiders at these companies might be buying because they know what’s coming in the economy. Otherwise, their purchases look like plays on bullish company trends.

Of course, whether you want to make money off of other people’s vices and addictions is something you will have to grapple with on your own. That’s a personal choice. But if you are OK with it — maybe because you share libertarians’ respect for the exercise of free will — here are three the insiders like.

I think these three stocks are much safer bets than the marijuana stocks above, marijuana-related funds like ETFMG Alternative Harvest exchange-traded fund MJ, -0.95% and India Globalization Capital IGC, -35.91% or other small- and mid-cap stocks like Aurora Cannabis ACBFF, -0.95% CannTrust Holdings CNTTF, -0.26% Supreme Cannabis Co. SPRWF, +0.00% DAVIDsTEA DTEA, -7.03% and Level Brands LEVB, +12.87%


MGP Ingredients (TICKER:MGPI)

Though millennials are said to favor marijuana over alcohol, booze is not going away. And when millennials do drink, they prefer premium spirits over beer and wine. This helps explain why sales of American whiskeys grew by 8% last year, according to the Distilled Spirits Council. Robust foreign demand is a big source of growth, too.

MGP Ingredients is a play on this trend. The “MGP” here stands for Midwest Grain Products. This Kansas-based company was once owned by Seagrams. The Seagrams name is still emblazoned on some of its buildings.

MGP stock is weak in part because the company saw temporary softness in the first half. It says this was because a few customers delayed or reduced orders since they had overstocked inventory.

That sounds like a typical management excuse. But the insider buying in the weakness supports the plausibility of this explanation. The company insists sales will rebound in the second half as this effect wears off, and as the company attracts new customers. MGP has reaffirmed guidance for the year.

Meanwhile, the company is planning for the future by building up an inventory of aged whiskey. The company sells alcohol for use by other spirits companies. But MGP has its own brands including Remus Repeal Reserve and Rossville Union Rye.

MGP has a strong balance sheet and decent cash flow. The company gets about 61% of its distillery revenue from spirits alcohol and around 26% from alcohol used in industry and food. This mix makes it a defensive play on food sales, too.

Keurig Dr Pepper (TICKER:KDP)

Like a lot of drinks companies, Keurig Dr Pepper is getting hit by higher commodity prices and rising logistical costs. But it’s hanging in there. The stock is not far from 52-week highs. I’ll chock it up to the brand strength here, which supports sales and pricing power. Besides Keurig, popular brands include Dr Pepper, 7UP, Canada Dry and Mott’s.

The Dr Pepper Snapple division posted 5% sales growth in the most recent quarter. A big part of that is coming from price increases. Further price hikes and cost cutting should improve results from here. One problem for Dr Pepper is that about 80% of its sales volume is in soda, which is going out of style. This division needs to develop more drinks beyond soda.

Keurig Green Mountain faces a different problem. Its coffee pods are too expensive. This prevents consumers from buying more of its brew machines. Keurig Green Mountain is solving this problem by walking down pod prices. That’s hitting sales in the near term. But it should pay off in the long term with improved brew-machine sales and market share. This would lead to higher coffee-pod sales on an ongoing basis.

Keurig brewers are in about 20% homes and offices in the U.S. Ongoing price cuts should help move that higher. In the background, margins have been advancing due to improving efficiency in its warehouses and delivery system.

Turning Point Brands (TICKER:TPB)

Turning Point Brands is a tobacco company that sells just about everything in tobacco but cigarettes.

It has three lines of business:

1. “Smokeless tobacco products,” like snuff and chewing tobacco sold under the Stoker’s brand.

2. “Smoking products” like Zig-Zag cigarette papers, cigar wraps, cigars and pipe tobacco.

3. Vaping devices and liquids, in a division it calls “NewGen” products.

Unlike cigarettes, other kinds of tobacco products like these have seen ongoing demand growth for years, at least in the low- to mid-single digit range. This company is doing even better, and it’s not just because of the popularity of vaping.

Sales grew 12.5% in the second quarter due to improvements in both volumes and price in its tobacco products. Some of that growth came from the acquisition of a company called Vapor Supply, which sells under brands such as VaporFi, South Beach Smoke and DirectVapor.

The company has a fair amount of debt. But it has decent cash flow and very strong profitability, as you might expect from a tobacco company.

The “insider” buy here was a $5.3 million purchase by beneficial owner Standard General, an investment shop. In my approach to insider analysis in my stock letter, I discount purchases by investment funds, since most active managers lag behind the markets. But Standard General has a good record here. In fact, Standard General’s most recent purchase happened at $34.60, just before a 25% spike in the stock, probably on news of the Vapor Supply purchase.

Talk about lucky timing!

<<<