Could You Be Missing Constellation Brands Stock’s Upside?

We think Constellation Brands (STZ) stock could be a good value buy. It is currently trading lower than average valuation, and has strong margins to go with its modest valuation.

Buying stocks with low valuations or trading well below their peaks but maintaining strong margins allows investors to capture mean reversion and valuation re-rating potential. The downside risk is potentially less because high-margin businesses can sustain earnings and recover faster when sentiment or market conditions improve

What Is Happening With STZ

STZ may be down -35% so far this year but is now 36% cheaper based on its P/S (Price-to-Sales) ratio compared to 1 year ago, and also trades at a P/E (Price-to-Earnings) ratio that is below S&P 500 median.

The stock may not reflect it yet, but here is what’s going well for the company. Constellation Brands sustains strong margins through pricing power, operational efficiency, and a focus on premium products. Its beer brands, like Modelo Especial, continue to gain market share in the U.S.. While the wine and spirits segment faces declines from consumer spending shifts and retailer inventory reductions, the ongoing divestiture of mainstream brands focuses the portfolio on higher-margin offerings. This strategic repositioning, alongside cost savings initiatives, is expected to enhance overall profitability. The discounted valuation reflects near-term macroeconomic headwinds and demand softness, particularly impacting the wine and spirits sector.

STZ Has Strong Margin Play

• Revenue Growth: -5.6% LTM and 0.7% last 3 year average. Not ideal, but this is a margin and value play.
• Strong Margin: Nearly 31.7% 3-year average operating margin.
• No Major Margin Shock: Constellation Brands has avoided any large large margin collapse in the last 12 months.
• Modest Valuation: Despite encouraging fundamentals, STZ stock trades at a PE multiple of 20.2

Below is a quick comparison of STZ fundamentals with S&P medians.

*LTM: Last Twelve Months

But What Is The Risk Involved?

While STZ stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. STZ took a hit of about 30% during the Dot-Com crash and nearly 63% in the Global Financial Crisis. The 2018 sell-off wiped out roughly 35%, while the Covid selloff saw a drop close to 49%. Even the recent inflation shock caused a 20% dip. The stock has strong fundamentals, but history shows it’s not immune when the market turns south. But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read STZ Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.

For more details and our view, see Buy or Sell STZ Stock.

Stocks Like STZ

Not ready to act on STZ? Consider these alternatives:

1. Accenture (ACN)
2. PayPal (PYPL)
3. Lululemon Athletica (LULU)

We chose these stocks using the following criteria:

1. Greater than $2 Bil in market cap
2. Meaningfully below 1Y high
3. Current P/S < last few year average
4. Strong operating margin
5. P/E ratio below S&P 500 median

A portfolio of stocks with the criteria above would have performed has follows since 12/31/2016:

• Average 6-month and 12-month forward returns of 12.7% and 25.8% respectively
• Win rate (percentage of picks returning positive) of > 70% for both 6-month and 12-month periods
• Strategy consistent across market cycles

Why Stock Pickers Win More With Multi Asset Portfolios

Markets move differently but a mix of assets smooths volatility. A multi asset portfolio keeps you invested and reduces the impact of sharp drops in any single area.

The asset allocation framework of Trefis’ Boston-based, wealth management partner yielded positive returns during the 2008-09 period when the S&P lost more than 40%. Our partner’ strategy now includes Trefis High Quality Portfolio, which has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices