1 Warren Buffett stock I’m staying well away from

Investors always pay close attention to which stocks Warren Buffett’s Berkshire Hathaway is buying – whether or not it’s the CEO himself making the decisions. And one stands out to me.

Constellation Brands (NYSE:STZ) looks like a classic example of being greedy when others are fearful. But despite the stock being down 31% in the last year, I’m staying away from this one.

Constellation Brands

it’s one of the largest US alcohol producers and marketers. And the industry as a whole looks as though it’s in a transition phase at the moment.

One of the biggest developments is the well-documented shift towards more premium products. This has been happening across beer, wine, and spirits. 

Constellation Brands isn’t oblivious to the ongoing changes. The company has been looking to position its portfolio to align with this trend by divesting some of its lower-priced lines.

This looks like a good strategy to me. But there’s another ongoing trend that looks more problematic, which involves beer and wine losing market share to spirits. 

That’s a problem for a firm where beer accounts for 85% of overall revenues. Despite growth in some of its premium divisions, the category as a whole being in decline is a big concern.

The Berkshire Hathaway investment managers might be seeing something, but I don’t know what that is.

Diageo

In the UK, Diageo (LSE:DGE) is also going to contend with challenges to the alcohol industry in general. These include the rise of GLP-1 drugs, which could well weigh on overall demand.

I think, however, the FTSE 100 firm has a more attractive portfolio for dealing with these risks. Its sales predominantly come from spirits, with smaller contributions from beer and wine.

The strength of Diageo’s spirits portfolio is well-documented. But even in its relatively minor wine division, the company is firmly positioned towards the luxury end of the market.

Through a joint venture with Moët Hennessy Louis Vuitton, Diageo has access to some of the top champagne names. These include Dom Pérignon, Moët & Chandon, and Veuve Clicquot.

Its beer division primarily consists of Guinness, which some analysts have speculated the firm might be looking to sell. But I don’t think this would be a particularly welcome development.

Guinness sales have been strong recently, underscoring the shift towards premium lines across categories. So I see the division as another reason to be optimistic about Diageo’s portfolio.

UK discount?

A lot of recent attention has been focused on UK shares trading at lower multiples than their US counterparts. But that’s not so obviously the case with Constellation Brands and Diageo. 

Despite a lower dividend yield and a higher price-to-earnings (P/E) ratio, Constellation Brands trades at a lower free cash flow multiple than its FTSE 100 counterpart. This means that — in one important respect — the stock is cheaper.

On balance, however, I think Diageo is in a stronger position to deal with the challenges the alcohol industry is facing. That’s why it’s the stock I’ve been buying for my portfolio.

The post 1 Warren Buffett stock I’m staying well away from appeared first on The Motley Fool UK.

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• Near a 10-year low! Is it time for me to dump this major FTSE 100 stock?

Stephen Wright has positions in Berkshire Hathaway and Diageo Plc. The Motley Fool UK has recommended Constellation Brands and Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.