We recently compiled a list of the Beer Loses Fizz as Spirits Gain Popularity: Top 10 Stocks to Buy. In this article, we are going to take a look at where Diageo plc (NYSE:DEO) stands against the other spirits stocks.
With 2024 heading to a close, the alcoholic beverages industry is also changing. Data from the Distilled Spirits Council (DSC) shows that spirits continue to gain over beer, which has traditionally been the go-to alcoholic beverage of choice. In 2023, spirits held more than 42% of the total market to mark a 13 percentage point gain since 2000. These shifts are coming at a time when Americans’ attitudes relating to alcohol are significantly changing. For instance, a very detailed survey from Gallup asked participants a plethora of questions surrounding their drinking habits and their perceptions of alcohol’s role in society.
When compared to participants surveyed in 2001, when 22% of participants viewed alcohol as good for health, this figure dropped by more than half in 2023 and sat a two decade low of 10%. Similarly, confirming the DSC’s data, while 47% of participants had drank beer the most often in 1992, not only did this percentage drop to 37% in 2023, but the figures for wine and liquor jumped to 29% and 31% from 27% and 21%, respectively.
29% drank no alcohol in the past week in 1987, while 33% reported the same in 2023. Other research also shows that while 72% of 18 to 34 year olds had reported having a drink in the past year between 2001 and 2023, this dropped to 62% as of 2024. This suggests that the trend for lower alcohol consumption is driven primarily by young people as the percentages increased for both 35 to 54 year olds and those aged above 55.
Building on this, while the dropping alcohol use might intuitively sound bad for the liquor industry as it contributes to lower sales, the reality might be a bit different. This is because lower intensity of alcohol consumption leads to better health outcomes and more long term business for the alcohol companies. Additionally, with the rising demand for spirits, younger drinkers tend to be focused on sweeter drinks like tequila or its close cousin Mezcal. This is because while the sales of America’s favorite spirit, vodka, remained flat in 2023, tequila/mezcal sales grew by 7.9% annually to sit at $6.5 billion and edge close to vodka’s dominant market position of $7.2 billion.
Additionally, Americans continue to be driven by convenience too, since the fastest growing spirits category is premixed cocktails or ready to drink (RTD) alcohol. While this category’s share of the market is relatively smaller at $2.8 billion, it jumped by 26.8% annually and was the only spirit with a double digit percentage market share gain.
While it’s possible that the drop in alcohol consumption is because of a health conscious population (with 39% believing in 2023 that alcohol is bad for health, up from 27% in 2001), it’s also possible that other recreational products such as cannabis and psychedelics are taking over. For cannabis, 2024 has proven to be a pivotal year as more users get to try it due to growing legalization and decriminalization. On this front, data gathered by the Substance Abuse and Mental Health Services Administration (SAMHSA) provides insights. The SAMSA’s 2019 National Survey on Drug Use and Health revealed that 50.8% or 139.7 million people reported drinking alcohol. The same survey for 2022 saw this figure drop to 48.7% or 137.4 million people. Crucially, 54.3% or 18.3 million aged 18 to 25 had drank within the past month in 2019, while in 2022, this figure was 50.2% or 17.5 million.
So, it’s clear that alcohol use has dropped in between 2019 and 2022. For marijuana, its use is growing on the other hand. In 2019, 35.4% of the same age group were marijuana users, which was significantly higher than the 29.8% in 2002. Overall, 17.5% or 48.2 million people used marijuana in the past year in 2019, up from 11% in 2002. In 2022, this figure had jumped to 61.9 million people. Another key study that directly analyzes whether marijuana is gaining over alcohol in popularity comes from the Addiction Journal. It analyzes the SAMHSA’s data between 1992 and 2022 to report a 15x per capita rate increase in cannabis use.
Numerically, 17.7 million people reported using cannabis on a daily or near daily basis in 2022, which was three million higher than the 14.7 million for alcohol use. Similarly, the intensity of cannabis use was higher as the median cannabis user reported using 15 to 16 days in the past month while the median drinker drank for 5 to 6 days.
To sum it up, right now, alcohol use is dropping, younger drinkers prefer sweeter drinks and spirits over vodka and beer, and the rate and scale of cannabis use are increasing. With these details in mind, let’s look at the top ten alcoholic beverage stocks to buy.
Our Methodology
To make our list of the top ten alcohol stocks to buy, we ranked the 40 most valuable alcoholic beverage companies that trade on the NYSE and NASDAQ by the number of hedge funds that had bought the shares during Q1 2024. Out of these, the stocks with the highest number of hedge fund users were chosen.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of bottles of whisky and other alcoholic beverages from a winery.
Diageo plc (NYSE:DEO)
Number of Hedge Fund Investors in Q1 2024: 30
Diageo plc (NYSE:DEO) is another diversified alcohol company that operates in both the spirits and the beer industry. This allows it a nimble business model which can adapt to the growth in either industry. Additionally, the firm is also keeping an eye on the RTD sector’s growth, and it announced a new RTD lineup in October 2023 and expanded it to the UK earlier this year. Like other large alcohol stocks, Diageo plc (NYSE:DEO) benefits from its strong brand recognition and enjoys a special place due to its well known vodka and spirit brands like Smirnoff and Johnnie Walker. At the same time, since it operates primarily in the premium market, Diageo plc (NYSE:DEO)’s stock is vulnerable to economic headwinds and primarily inflation. Conversely, the shares can benefit if investors perceive the economic outlook is improving, and Diageo plc (NYSE:DEO) also benefits from a stock market share in emerging markets. These can provide it with more room to grow in the future due to economic growth in these countries.
Argosy Investors mentioned Diageo plc (NYSE:DEO) in its Q2 2024 investor letter. Here is what the firm said:
“Diageo (DEO) was likewise added to the portfolio this quarter. We don’t believe we have any special insight into this well-known spirits maker, but believe DEO is capable of providing long- term attractive returns and became priced at a level where we felt we were taking less risk in the short term as well. Owner and marketer of the Johnnie Walker Scotch, Tanqueray gin, Smirnoff vodka, Guinness beer, and Baileys liqueur brands, plus a stable of emerging brands, Diageo is a fixture any time alcohol is being served. We believe we’re paying a high-teens multiple of quite stable and growing earnings, and benefit from a healthy 3% dividend in the interim. We won’t wow anyone with our analysis on this one, but when everyone else is rushing to buy Nvidia, our exposure to alcohol should help with any hangovers in the rest of the market.”
Overall DEO ranks 4th on our list of the best spirits stocks to buy. While we acknowledge the potential of DEO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.