Alex Green: You’d have to be drunk to own this beer stock

From Alexander Green, Chief Investment Strategist, The Oxford Club:

After a round of golf about 20 years ago, a friend invited me to taste a draft beer he’d just discovered.

It was Samuel Adams Boston Lager.

I took a sip and looked at him with a grin. “That may be the best beer I ever tasted,” I said.

(This, of course, was long before the nation had 5,300 craft breweries turning out a slew of delicious, innovative brews.)

I told my buddy I had just one question: “Is the company that makes this publicly traded?”

Indeed, it was. I bought 2,000 shares of Boston Beer (SAM) at the market open the next morning.

It was a good move. In the years that followed, my shares doubled, doubled again, and doubled many, many more times.

But this might be the last stock I’d buy today. In fact, if you’re looking for potential short candidates, you might start with Boston Beer.

Here’s why…

Most investors know to take optimistic statements by company founders and officers with a grain of salt. They have a vested interest in making a positive outlook sound stellar and a lukewarm one temporary or easily surmountable.

Contrast that with a New York Times op-ed piece this month by Jim Koch, founder and chairman of Boston Beer.

He laments the consolidation that has taken place in the brewing industry in recent years, pointing out that 90% of domestic beer production is actually in the hands of two foreign-owned brewing giants: Molson Coors and AB InBev.

(Most beer drinkers are blissfully unaware that their “independent” craft brews – like Terrapin, Goose Island and 10 Barrel – are actually subsidiaries of these behemoths.)

Koch complains that this brewer’s duopoly has led to biased wholesalers and distributors who give superior promotion, visibility, shelf space and marketing support to Molson and InBev products.

In his view, the government’s unwillingness to use antitrust enforcement against these two undermines the economic interests of American brewers.

He decries the new beer landscape, one that “is heavily tilted toward giant foreign-owned conglomerates” and even warns that “we may be witnessing the beginning of the end of the American craft beer revolution.”

If you wondered why Boston Beer – in the midst of a rip-roaring bull market – is down from a high of over $300 a share to around $138, you now have your answer.

And given this dour outlook from the founder and former chief executive, why would any sober investor buy the company’s shares?

Especially given the fact that insider ownership in the company is in decline, and Koch himself is a regular seller of the stock.

(Of course, when it really hits the skids, he can point out that he warned us all in his New York Times op-ed column.)

Insider selling is not always a reliable indicator. There are reasons that an officer or director might sell that have nothing to do with the outlook for the company.

They might be diversifying their portfolio, or buying a new house, or putting kids through an expensive private college.

(Contrast that with insider buying, which has no explanation other than that the officer or director – who has access to all sorts of material, nonpublic information – believes the shares are undervalued.)

Insiders also sell sometimes because the prospects for the business are lousy. And that appears to be the case here.

Part of Boston Beer’s problem is that consumers care about how a beer tastes, not whether it’s owned by a corporation (foreign or domestic) or a couple of guys with a vat out back.

So let’s summarize the situation at Boston Beer, a company that makes a fine product, in my view, but in an increasing competitive environment…

Sales are growing at a meager 2% rate. In a bull market, the stock is in a multiyear decline. The chairman believes the entire craft brewing industry is threatened. And he is dumping shares himself.

This is not a pretty picture.

I’m curious, however. If these two international giants are making Koch’s life difficult, why isn’t he arranging a sale of the company to them… rather than just bailing out of his own shares?

Good investing,

Alex

Crux note: A longtime friend and colleague of Dr. Steve Sjuggerud, Alex was graded by the Hulbert Financial Digest as one of the best stock pickers in the newsletter business… And he recently revealed one of his most closely held secrets. It has to do with an unknown elite group of Wall Street insiders with a 100% success rate. By following the moves of these elite traders, you can quickly and easily find dozens of double and triple-digit-gain opportunities. Alex explains everything, including three of the latest trades – in this exclusive interview.

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