Warren Buffett’s Berkshire Hathaway sold more stock than it bought in 2024, so it likely raised some eyebrows when the company revealed its position in Constellation Brands (STZ -1.10%).
However, that investment has likely lost value for Berkshire so far as tariff fears and falling alcohol consumption have weighed on Constellation stock. This could mean that Berkshire needs to lean more into Buffett’s strategy and not less. Here’s why.
Berkshire and Constellation Brands
On the surface, Constellation looks like a Buffett stock. Buffett likes “forever” stocks with product demand that never ends. People have consumed alcohol since the beginning of time, so Constellation’s product selection would certainly qualify. Constellation also produces the U.S.’s No. 1 beer, Modelo Especial, meaning it bought a market leader, a distinction top investors tend to seek.
Moreover, Buffett has always been a value investor, and the current state of Constellation Brands points to a low valuation. Indeed, some one-time charges raised its P/E ratio to 47. Still, at a forward P/E ratio of 15, the stock appears to trade at a significant discount.
Additionally, its price-to-sales (P/S) ratio of 3.4 shows that the metric is coming off its lowest levels since the beginning of the pandemic. That P/S ratio fell from 6 in 2022.
Furthermore, Buffett and his team probably saw an opportunity due to its abysmal stock performance. Constellation stock had generally tracked the S&P 500 until it stopped rising in 2023 and declined more recently.
One of the more recent concerns is the tariff worries that caught investors off guard, including possibly Buffett himself. Constellation’s portfolio includes numerous imports including several Mexican beers like Modelo and Corona and spirits such as Casa Noble Tequila. Since these products will probably become more expensive, sales will likely fall, and Modelo could lose its No. 1 position.
A promising investing strategy
However, the situation opens the possibility of a unique investing opportunity: the chance to “out-Buffett” Buffett.
One way is by buying shares at a lower valuation. Since Buffett’s team bought shares in the fourth quarter, they bought at a P/S ratio between 4 and 4.4. As mentioned before, shares are available at 3.4 times sales, and since more declines are possible, one may conceivably buy shares at a lower valuation if the sell-off continues.
Second, new shareholders could earn a higher dividend yield. Currently, its annual payout of $4.08 per share yields about 2.2%, which is significantly more than the approximate 1.5% dividend yield of the S&P 500.
Additionally, it has raised its dividend annually since payouts began in April 2015. Although last year’s payout hike was only a 1% increase, the dividend has often risen by double-digit percentages. Also, Constellation’s $1.9 billion in free cash flow in fiscal 2025 (ended Feb. 28) far exceeded the $732 million cost of the dividend, meaning it can probably afford further payout hikes.
Admittedly, Berkshire’s Q1 purchases will not be known until it releases its 13-F, and it is possible Buffett’s team added shares in the previous or current quarters. Still, if one can make all purchases at a lower share price, this might be a time when investors can beat Buffett’s returns.
Investing in Constellation Brands
Despite Berkshire’s investment, Constellation Brands faces near-term uncertainty amid rising tariffs and falling consumption. Thus, investors should not assume that the stock has bottomed or will bottom soon.
Still, Berkshire’s investment team likely saw an opportunity since it began buying at a higher price than today’s. Indeed, the low valuation, prospects for rising dividend returns, and history of at least matching the market’s performance may present an opportunity. With the possible chance of earning higher returns than Berkshire, investors have an increased incentive to begin adding Constellation shares.
Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.
