The current market environment is tough for American Beer, says Matthew Reilly of Morningstar, Inc. According to Mr. Reilly, American Beers have very high commodity costs. As a result, consumers are switching from domestic beers to spirits, wine and craft brews. While this is going on, you still have three “oligopoly particpants” fighting for volume: Anheuser-Busch, Molson Coors (TAP), and SABMiller (SBMRY).

However, Mr. Reilly feels that there are still reasons to invest in Anheuser-Busch and Molson Coor.

• Anheuser-Busch
  • While some may feel investing in Anheuser-Busch is synonomous with investing in Budweiser, this is not entirely the case.
  • Anheuser-Busch controls half of the domestric beer market in terms of production and distribution.
  • As a result of their distribution control, they can impose product exclusivity on a large portion of their distributors, thus giving themselves the ability funnel legacy and new products.
  • They are increasingly delving into niche spirit brands- import beer brands, deals with domestic craft brewers, energy drinks and other non-alcoholic beverages and nutracueticals. 

•  Molson Coors
  • Molson Coors holds an “incredibly solid” position in the Canadian beer market, making up half of a “stable duopoly”.
  • The merger of Molson and Coors should alleviate much of the freight costs that frustrated earnings at Coors, pre-merger.
  • They are more likely to compete on price than their major competitor, AmBev.
  • Molson Coors has a UK operation and, despite recent turbulence in the UK market, rationality is beginning to return to that market, thus presenting an opportunity for Molson Coors to take note of the realities of this market, and turn a profit. 

For on this and other issues in the Beverage sector, click here.

In this week’s examination of REIT’s, Michael Mueller has some interesting thoughts on what will happen to Mall REITs over the next few years:

Mr. Mueller: You should have decent external growth, decent earnings visibility and probably accelerating earnings growth for the malls over the next few years. What’s pretty interesting is just about every company in the mall space has a sizable new development or redevelopment pipeline. It’s very consistent from company to company.

For our full issue on REITS in Retail, Industrial and Health Care, click here.

David Rolfe, of Wedgewood Partners, talks, Cassandra like, about his predictions for an economic environemnt unlike anything seen in recent years:

 Mr. Rolfe: We are going to sound like Cassandra, but one must suspend disbelief not to recognize the multitude of data points that speak to a radically different economic environment from what we’ve enjoyed over the past five or six years. Nobody has repealed the business cycle, nobody has repealed the profit cycle, nobody has repealed the credit cycle and lastly, nobody has repealed investor fear and greed. So we believe investors need not only to reassess where their portfolios have been invested, but we believe that quality is the order of the day, if not the order for the next few years, in both equity and fixed income markets.

For more on Mr. Rolfe, Wedgewood Partners, and their predictions for the future, click here.

The current “hot button product” in Consumer Finance, according to Analyst John Hecht of JMP Securities, is the payday lending product. Here’s a quick rundown of the way payday lending is working now:

• Payday Lending is entering its “maturation” phase.
• What this means is that  laws are being updated and rationalized, which may be restrictive in the short term.
• However, the short term restrictions will allow for a  more normalized lending environment in the long term.
• The normalization will be of great benefit to large players over an extended period of time.
• “There was no incremental negative news in 2007 at the state level with respect to payday lending.”

For our full Consumer Finance report, including full interviews by Mr. Hecht and others, click here.

With all the hubub about suprime markets, and their effects on the economy, the question remains: are these subprime concerns justified across the board?

 TWST: Are the concerns justified or can they come up with the funding they need to support what they are doing?

Mr. Gokhale: Based on everything we can see and conversations with the companies, it looks like the subprime consumer finance companies do have adequate access to liquidity. The fact that AmeriCredit, for example, which is a subprime auto finance company, was able to extend a financing facility, was a very positive sign. Look at a company like CompuCredit, which recently, through an affiliate of Morgan Stanley, was able to get a securitization facility for their lower-tier or higher-risk fee-based credit cards. That suggests to me that the financing is out there; it’s available. My view is that the issues about funding and liquidity are overblown in the non-mortgage specialty finance space.  

For the full interview with analyst Sameer Gokhale of Keefe, Bruyette & Woods, click here.

This week we spoke with money manager Randall Coleman  of Berkeley Capital Management, LLC. He spoke to us about his sell discipline, and nature of his belief in the companies he invests in.

 TWST: You hold onto what you think is the right stock even if it’s getting bad news?

Mr. Coleman: Absolutely. It’s a gut-wrenching decision to make and it leaves a big pit in your stomach when it happens, but there have been several times when we’ve had big down moves in stocks and we’ve made the decision to stick with it because nothing fundamentally had changed with the company. If it’s not within the control of the company, then it’s usually something that they’ll be able to work through.

 For more on Randall Coleman and Berkeley Capital Management LLC, click here.

While the housing and mortgage markets dominate conversations about consumer finance, there are areas that are still performing well – although not necessarily reflected in stock price.

TWST: What’s going on in the pawnshop, payday lender space?

Mr. Eckert: Not much. I think that there is this fear of contagion of subprime mortgages, that it’s going to spill over into payday lending or pawn lending, which couldn’t be more ridiculous. I don’t think very many pawn customers or payday lending customers are homeowners, number one. Number two, I think that in a recessionary environment or in an environment where people are losing their homes or no longer have access to equity in their homes, they may turn to alternative sources of financing. I think that while loan losses may go up, I think the impact of that would eclipse the higher, the more elevated levels of loss.

TWST: Has business held up in this changed environment?

Mr. Eckert: Business is booming. It’s growing like it has been for the last five years. Again, I don’t think you can draw a correlation between the broader housing market and the segments of the population that use pawnshops and payday lenders.

 More about TWST’s Consumer Finance issue here.

In our latest issue, we spoke with Paul Mansky, senior analyst at Citi Investment Research. He told us about some new technologies that are being developed in the data storage sector:

 Mr. Mansky: [One new technology in data storage] is referred to as de-duplication, and as the name implies, this is a fairly advanced technology that looks across the storage domain for redundant copies of data. Just by way of very simple example, if I sent an e-mail with an attachment to a group of 10 people within my company, and four of them said, “Hey, this is a garbage” and threw it away, but six of them kept it, there are six redundant copies of that data out there. De-duplication looks around for those redundancies and consolidates them to one or two…Data Domain (DDUP), which has recently gone public, has become largely synonymous with the technology.

 For more information on this, and other technologies and issues to do with data storage, click here.

Portfolio Manager William P. Wells talks briefly about the power of fear to create low valuations, and excellent opportunity for investments:

Mr. Wells: We dramatically increased our investments in China during the SARS situation as that crisis helped create a great buying opportunity. There was a lot of fear during that situation and we were able to establish positions at low valuations.

For more from William P. Wells, click here.

We talked this week with several portfolio managers about  the sell discipline at their particular firms: 

• Michael C. Heaberg, Axiom Asset Management

  • “Our sell discipline is we attempt to purchase stocks when we feel like we can buy a dollar for 50 to 60 cents. What we generally do is continually re-evaluate the fundamentals. We’re continuing to look at the company’s earning power and changes, in most cases improvements in their businesses, and re-evaluating the fair value of that company as time goes on, but typically when a security we hold for growth doubles in value, then we’re going to sell a part of our position. “

  
  

• E. Stewart Johnson, Philo Smith & Co.
  
  
  • “The primary trigger [for an exit from our portfolio] is a change in management. The process is pretty simple. The five people on the Investment Committee discuss names that stock’s price would be a red flag. So two common triggers would be a change in stock price or a change in management.

• William P. Wells, Pope Asset Management, LLC.
  
  
  • “We’ll set a price target for all our positions. Generally, as we get close to that target we will exit the position. In addition, if we find other investments at a much greater discount, we can swap into those. As for the question on turnover, we are not a very good brokerage client. We estimate our turnover at 25% or less.”

For the full interview with each of these portfolio managers, as well as others, click here.