The bargains in this market often occur after a company reports, not before, and when those bargains occur you have to pounce, provided that the issues that cause the discount are short term and the underlying growth longer term remains as strong or stronger than ever.
I say that to myself all of the time and yet it is so hard to pull the trigger when it actually happens.
Take, the stock of Brown-Forman (BF.B) , the maker of Jack Daniels, Woodford Reserve, Old Forrester and Herradura and Finlandia, which got clubbed this week after it announced what looked to be strong earnings.
Here's a company that put up a terrific quarter, with double-digit growth on pretty much every single brand with the exception of the giant flagship of Jack Daniels, which had five percent growth.
I liked almost every aspect of the quarter from the boost to margins to the growth of premium brands where the real money is, to the expansion internationally. Fifty percent of this company's business is overseas.
But Brown-Forman's stock got hit with a one-two punch pretty much out of nowhere, one of the jabs of its own doing but the other from none other than the talk of tariffs for none other than price of steel and aluminum.
First, the company's cfo, Jane Morreau, amid all of the double-digit gains, mentioned "growth in the U.S was slower given the competitive marketplace." And then the EU, in a retaliatory mood, said it might have to slap a tax on bourbon, which, coincidentally happens to be made in Kentucky. Ninety-five percent of all bourbon hails from the home state of the Senate Majority Leader Mitch McConnell.
How do you say leverage?
So the stock, which had been on a terrific upward trajectory, $44 to $56 since November, gets clubbed down to $52 in a heartbeat.
Why is this stock now so intriguing to me? First, you have to understand that you don't get much of a chance to get into the shares of a company with tremendous future growth rates, and the maker of Jack Daniels has that in spades. It's worked its way up the pricing food chain in many different smaller brands that are blossoming into bigger ones. It has managed to capture the hearts of the hard-drinking millennials with brands like Tennessee Honey, Gentleman Jack and Tennessee Fire. It's got industry-leading operating margins well over 30%, returns on invested capital over 20% and it's committed to returning capital including the $1 special dividend to be paid in late April.
But it is the kiss of death to admit that there is any competitive threat to any part of your business these days and Brown-Forman did just that even as the CEO, Paul Varga, later just put it as something that happens because it is "mathematically more difficult when there's that many alternatives in the marketplace."
How about the potential tariffs? Twenty-five percent of their business does come from Europe and it's a major source of growth. As Varga says "If all of this comes to fruition the irony I feel is that a company like Brown-Forman could be an unfortunate and unintended victim of a policy which, in part, is aimed at promoting something, which Brown-Forman is a stellar example, of, committed long-term American manufacturing."
So why buy?
First, this is a company that's been there before. Back in 2014, when the Russians played tough with bourbon when the Russian government's consumer watchdog found insect poison inside samples of the Tennessee Honey Whiskey.
Tensions back then caused the stock to plummet to $35. It proved the be a great and short-lived buying opportunity. The Russians love their Jack. Does anyone think this will be different?
More important, Brown-Forman may be one of the best ways to invest in the rapidly growing middle class and what the company calls "its thirst for premium western spirits."
In other words, you are selling this company's shares because of what may end up being a one-time retaliatory blip in Europe and a tougher competitive environment for just one of its brands when the main chance is emerging markets, of which the company remains at its infancy.
The traders who dumped the maker of the 150-year-old Jack Daniels didn't expect to hear anything negative short term, let alone a notion of competition for Old Number 7 and a steel-related EU tariff. The investors who are buying the maker of the most iconic brand in American spirits are getting a bargain because long term, frankly, I don't think the prospects have ever been brighter for the financial and name-brand leader in this growing and lucrative market, one of consumer packaged goods' few areas of unfettered long-term growth.
I'm with the long termers. We will look back not long from now and say, like when the Russian inset fracas occurred, "how did we get into that stock so cheaply?" That's the kind of bargain that doesn't happen that often.
It's the kind of bargain you buy.