Nowhere is the generational shift toward small, local brands more apparent than in the craft beer market. And we're bringing you a pick today that is raking in profits from it.
Overall beer sales by volume were down 1% last year in the United States, according to the Brewers Association. But volume sales for craft beer went up 5%.
By dollar sales, craft beer increased 8% last year and is now up to $26 billion annually - representing an impressive chunk of the $110 billion U.S. beer market as a whole.
But just because the trend is shifting away from big, nationally recognized brands doesn't mean investors can't profit from it.
You just have to find a craft beer stock like the creative company we've picked today.
Just about everyone likes the idea of locally made products. Aside from the economic benefit to the surrounding communities, it's hard not to appreciate the added character of something you know was made nearby - whether you're a resident or a visitor.
The problem is scale. Brands that are restricted to low volume and limited distribution have a ceiling on their potential.
But if you link those brands together, pool their resources, and attach them to a multinational distributor, the potential suddenly becomes limitless.
That's what our pick has done.
By letting the brands under its umbrella retain their local production and character, this company has found a way to appeal to younger drinkers who prefer craft beer to big brands.
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The Brewers Association reports that, though Millennials represent 41% of weekly beer drinkers, they represent 57% of craft beer drinkers. The younger a drinker is, the more likely they are to drink craft beer. So the market is only going to get worse for big brands and better for craft beer in the coming years.
Adding to those tailwinds, our pick today has been given a top score by the Money Morning Stock VQScore™ system, which suggests that it's due for a rise.
Plus, this company's earnings are absolutely exploding...
"Keeping It Local" Is This Company's Key to Success
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There's some debate over whether Craft Brew Alliance Inc. (NASDAQ: BREW) technically qualifies as a "craft beer" company. But that's mainly because of the revenue it generates, which is more on par with a national brand than a local brewer.
But it's still growing like an up-and-coming superstar.
BREW's biggest brand - Kona Brewing Co., based in Hawaii - grew 10% in 2017. And one of Kona's beers, Big Wave, was up 25% on the year as of the company's last quarterly report.
To give you an idea of what a dominant presence Kona is in the enormous craft beer market, this one brand alone accounted for 4% of all craft beer sales growth in 2017.
With brands like Kona, Craft Brew Alliance maintains a strong regional identity even as it exports products to other locations. You can get a taste of the Big Island even if you're in California or Kansas City.
Craft Brew's other brands include Widmer Brothers Brewery, representing about 15% of total sales. Widmer's beers include Russell Street IPA and Steel Bridge Porter, named after the landmarks in Portland, Ore., where the beer is brewed.
Widmer was one of the original two brands that merged to found the company, along with Seattle-based Redhook Ale. And like Widmer Brothers, Redhook's dedication to craft beer goes back to the early 1980s, long before it would become a trend.
As Redhook's website puts it, the founders' original mission was to give Seattleites something better to drink than the "light yellow fizzy stuff" that was widely available.
Since the merger, Redhook and Widmer Brothers have added Kona to the mix, as well as two other Portland-based labels - Omission Beer and Square Mile Cider.
Plus, the company has entered into distribution agreements with local breweries from Nantucket, Miami, and North Carolina.
That distribution comes from Anheuser-Busch InBev NV (NYSE: BUD), which owns 32% of the company. Having such a powerhouse handling the distribution links Craft Brew to bars and retailers in 30 countries around the world.
But even as it grows and competes with the big names in the industry - Craft Brew is now the 9th biggest brewing company in the world - the company keeps a "home market strategy." That is, it doesn't lose sight of its original mission: to brew quality beers that represent the localities they come from.
For example, the company is committed to horizontal innovation. Each of its breweries has at least two new brews in the pipeline right now - all of which originated at the local level, not from company headquarters.
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It's not surprising then that some of the plans for future drinks include forward-thinking ideas like cannabis-based beer, canned cocktails, and hopped soda.
And a look at BREW's numbers shows that it's ready for a big rise...
BREW Is Low Risk, High Reward, and Due for a Pop
With a market cap around $355 million, Craft Brew Alliance has plenty of room to grab more market share, especially as the younger generation ages and represents more of the market.
BREW's share price has slipped 13% from $21 in early July to a little over $18 currently. That's in spite of crushing earnings expectations in its August report, posting earnings per share (EPS) of $0.23 compared to expectations of $0.13.
That figure was double what it was in the same quarter last year. And based on consensus estimates, Craft Brew's EPS should grow an astounding 207% this year.
A majority of analysts tracked by FactSet rate BREW a "Buy," with a price target about 25% above its current level. Zacks Investment Research just joined that club in mid-August, upgrading the stock and setting a similar price target.
That looks conservative, though, when you consider that BREW's price/earnings to growth ratio for the next twelve months is exactly half the industry average.
In other words, this stock could be ready to double in short order.
Keep in mind, too, that Anheuser-Busch has an incentive under its current agreement to buy Craft Brew Alliance at a price no less than $24.50 per share.
That means this stock has not just a high ceiling, but also a high floor.
So once you buy your shares, you can settle in and enjoy the ride.
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About the Author
Stephen Mack has been writing about economics and finance since 2011. He contributed material for the best-selling books Aftershock and The Aftershock Investor. He lives in Baltimore, Maryland.