Cowen Names Constellation Top Pick With Less Marijuana Risk Than Peers

Though Constellation Brands (STZ) has been punished by relative weakness in consumer staples, uncertainty around Donald Trump's trade and immigration stances, and potential concerns of a marijuana boom, research firm Cowen named the stock a top pick for 2017, saying demand trends are strong and Constellation remains uniquely insulated from legal pot.

COWEN NAMES CONSTELLATION TOP PICK: Naming Constellation Brands her top pick for 2017, Cowen's Vivien Azer contended Thursday that the beer, wine and spirits maker offers a "best in class" earnings growth profile. She explained that the importer of Corona and Modelo beers has been under significant post-election pressure due to concerns over tariffs, deportations, and "sentiment around Mexican goods in general" alongside general weakness in consumer staples, but the analyst believes those worries and resultant selloff are "overblown" and have generated a "very attractive" entry point into the shares. Fleshing out her bull thesis, Azer cited "continued strength" in beer and "much improved trends" in wine and spirits while also cheering the company's recent, likely margin-boosting acquisitions and focus on capital returns. Notably, the analyst also addressed rising usage of legal cannabis, arguing that while the trends poses a risk to the alcohol space as a whole, Constellation remains "well insulated" given its over-exposure to Hispanics and women, both of whom under-index to marijuana. Looking ahead to coming milestones and catalysts, Azer will be watching monthly Nielsen metrics -- which have shown no sign of slowdown for Constellation beer -- as well as developments around Trump's first 100 days in office, which should provide clarity on the aforementioned political risks. The analyst has an Outperform rating and $200 price target on the shares, forecasting strong double-digits earnings growth in the coming year.

ALCOHOL THREATENED BY RISE OF MARIJUANA: The November 8 elections saw California, Maine, Massachusetts and Nevada legalize recreational marijuana usage, and Florida, Arkansas, North Dakota and Montana pass medical marijuana initiatives. According to a Bloomberg report the week prior, alcohol groups had lined up against the ballot measures, with several trade associations donating tens of thousands of dollars to the "no" campaigns. The publication contended that "the booze industry is worried that a couple of hits of marijuana may cause customers to drink less," adding that public regulatory filings from Boston Beer (SAM) and Brown Forman (BFA) list weed legalization as a risk to alcohol demand.

PRICE ACTION: Shares of Constellation Brands are up 0.2% to $155.95 in afternoon trading, slightly underperforming the market. The Consumer Staples (XLP) and Consumer Discretionary (XLY) SPDR ETFs are up 0.3% and down 0.3%, respectively.