I began thinking more and more about the U.S. beer market a few
weeks ago after hearing reports of yet another blockbuster year for
the Vermont Brewers Festival. With over 30 different breweries from
the region participating, the turnout was strong and the beers
I've also noticed the massive amount of shelf-space now
dedicated to craft and micro brews at my local gas stations,
convenience stores, and liquor stores. After realizing that I was a
huge fan of many of these frothy offerings I began researching
growth stock investment opportunities in the craft brewing
I've found two stocks that are compelling small cap investments
and even though they have rallied over 180 percent in the last year
and a half, I believe they still have room to run.
***According to a report released last week by Brewers
Association (the largest organization of brewers in the U.S.),
craft beer now accounts for around 5 percent of the total U.S. beer
market. That's not a huge percentage, but sales volumes have
increased 9 percent in the first half of this year. And this story
does not stop there.
Paul Gatza, director of the Brewer Association, had this to say
on the subject of market strength: "
While craft brewer sales volume climbed 9 percent in the first
half of 2010, overall U.S. beer industry volume sales are down 2.7
percent so far
What we have here is a market that appears to be experiencing
near zero growth (or even contraction if you assume 2010's results
will occur again in 2011), but consumers are becoming increasingly
interested in the craft brewing segment. And they're buying those
beers instead of the mass produced offerings.
Odell Brewing Company said people are
"...looking for bigger flavors and subscribe to the
drinking-less-but enjoying-it-more club"
. It's the quality over quantity concept that's becoming more
prevalent across many industries - and it's allowing craft
breweries to grow and increase sales volumes.
***So what qualifies a beer company as a 'craft brewer'? Craft
beers are produced at a small brewery with output of no more than 2
million barrels a year. According to the report released by the
Brewers Association last week, the number of these types of
breweries is steadily increasing.
But more breweries will mean increased competition - so
differentiation is critical for companies to be successful over the
long-term. Two small cap companies are excelling in this area, and
I think have potential to grow and grab market share from the
***The first is
Boston Beer Co. Inc. (
. This brewery produces the popular Samuel Adam's Lager and Twisted
Tea. The company is headquartered in Boston, Ma, and has breweries
in Massachusetts, Ohio, and Pennsylvania.
Boston Beer recently reported results for the three months ended
June 26, 2010. The company's revenue increased to $129.6 million,
up 9.7 percent from the comparable three months of 2009. The
company also saw its gross profit increase 16.6 percent over the
Boston Beer is growing fast enough that it may soon outgrow
craft beer status. The brewer expects to sell more than 2 million
barrels by 2012. But just because the company may outgrow the
'craft brewer' definition doesn't mean it isn't a compelling
investment. It may just be in the sweet spot - small enough to gain
greater popularity as a top-quality brewer but large enough to gain
distribution efficiencies and greater shelf space.
***The second company I've been following is
Craft Brewers Alliance, Inc. (Nasdaq: HOOK)
Headquartered in Portland, Oregon, Craft Brewers Alliance brews
high-quality craft beers including Redhook Ale and Goose Island.
Craft Brewers currently produces 31 beers - most are regional, but
some are gaining attention at the national level.
Last Friday, Craft Brewers Alliance reported results for the
second quarter of fiscal 2010. The company's operating profit
increased by 14 percent and gross margin increased by three
percentage points. The stock jumped 13.5 percent on Friday, closing
at $5.96 per share.
***Both Boston Beer Company and Craft Brewer Alliances are in a
growing industry. Both stocks have also been strong performers of
late. As with all small cap stocks, it's important to pick the
right time to establish a position - if you decide you're a fan of
The chart below compares their returns over the last year and a
They have clearly outperformed the S&P 500 over this period
- both gaining around 150 percent while the S&P has gained
around 30 percent.
***Since craft beers typically cost more than traditional, mass
produced beers, you might think consumers in a recession would
shift to cheaper offerings from mega brewers. Even analysts say the
success of craft beer is surprising given the economic conditions
over the last year - but they do believe there's an
Lauren Torres, beverage analyst at HSBC, says,
"I think people like affordable luxuries in this type of
economy and maybe they can't buy a new car or a second home, but
they can afford better beers".
I couldn't agree more. People like to indulge, even if just a
little bit. It's easy to talk oneself out of buying a fancy flat
screen TV - or a new set of golf clubs or a new couch for the
living room. If you already have these items and they work - why
A more expensive beer on the other hand is easy to indulge in.
After all, if you buy two 'expensive' beers at a total cost of
$4.00 (from the liquor store) versus three 'cheap' beers at a cost
of $2.50, you've hardly broken the bank.
The homegrown element of craft beers is also something that's
very appealing to the growing number of consumers who subscribe to
the local food movement. If these people like to purchase food
that's grown closer to home, it's rationale to assume they like to
do the same with beer. Of course, buying a 'local' beer that brewed
on the other side of the country isn't exactly in-line with the
localvore food movement, but the idea is pretty much the same - and
it's easier to bottle and ship a craft brew than a dozen cherry
Take a look at these two companies and let me know what you
think. I like them, and suggest putting them on your watch list.
And when you get around to trying their beers, I bet you'll like