Warren Buffett, the renowned CEO of Berkshire Hathaway, wasn’t overly optimistic about the stock market in 2024. Over the past year, Buffett made significant moves, offloading over $134 billion worth of equities from his holding company’s portfolio. In particular, the fourth quarter saw heavy sales of bank stocks, including a 15% reduction of Berkshire’s stake in Bank of America, a 73% cut in Citigroup, and an 18% drop in Capital One Financial. Buffett even divested from two S&P 500 index funds in the last quarter.

Despite these sell-offs, Buffett hasn’t abandoned the market entirely. In fact, he invested over $1 billion into Constellation Brands (NYSE: STZ), a stock he sees as undervalued. With Constellation’s stock dropping further in January after a disappointing earnings report, Buffett’s investment could now present an even better buying opportunity than before.

Why Buffett Chose Constellation Brands

Constellation Brands is a major player in the alcoholic beverage industry, known for its flagship brands like Corona and Modelo. Although the company also owns a wine and spirits division, its beer business dominates, accounting for more than 80% of sales and operating income. This gives Constellation a significant edge in the competitive market for Mexican beers.

While the alcohol industry faces challenges, especially among younger consumers like Gen Z, Constellation’s beer division continues to show impressive growth. The company’s ability to innovate with products like Modelo Chelada and Aguas Frescas helps it maintain a competitive edge against emerging trends, including ready-to-drink cocktails and hard seltzers. For fiscal 2025, Constellation is projecting revenue growth of 4% to 7%, thanks to its strong brand portfolio and product innovations.

Constellation’s strategic positioning also gives it an advantage. It commands 94% of the U.S. market for Mexican beers, which means significant advertising power and the ability to premiumize its products. This has allowed the company to consistently raise prices while preserving market share.

Potential Risks for Constellation Brands

Despite its strengths, Constellation Brands does face some risks. The potential for a 25% tariff on Mexican imports could hurt the company’s pricing structure, while new health warning labels on alcohol packaging, as proposed by the U.S. Surgeon General, could also impact sales. However, Constellation’s premium strategy and loyal customer base give it a strong foundation to navigate these challenges better than its competitors.

Buffett’s Investment Strategy and Constellation’s Intrinsic Value

Buffett is known for his straightforward investment strategy: buy undervalued stocks with a margin of safety and wait for their market price to align with their intrinsic value. This is why Constellation Brands caught his attention.

Although Constellation’s most recent earnings report was disappointing, with flat revenue and weaker wine sales, Buffett likely saw the sell-off as overblown. Management has revised its full-year outlook but still expects 10% earnings growth for fiscal 2025. With beer now accounting for the majority of Constellation’s sales, the company’s future earnings potential looks solid.

At a forward P/E ratio of just 13, Constellation offers strong value for a company with significant competitive advantages. Buffett likely sees this as an opportunity to buy low, particularly given the company’s track record of outperforming the broader market.

Buffett’s Preference for Smaller Companies in 2024

Buffett’s investment in Constellation Brands is part of a broader trend of focusing on mid-cap stocks. Constellation, with a market capitalization of around $32 billion, aligns well with the other companies Buffett invested in recently, such as Domino’s Pizza ($16 billion), Pool Corp ($13.1 billion), and Sirius XM ($8.4 billion).

In contrast, Buffett has been shedding larger, more expensive stocks like Bank of America ($341 billion) and Citigroup ($150 billion). By focusing on smaller, undervalued companies, Buffett is signaling that he believes these stocks offer more attractive valuations in today’s market.

Is Constellation Brands a Good Investment for You?

If you’re considering investing in Constellation Brands, it’s important to do your own research. While the Motley Fool Stock Advisor team has identified some of the best stocks for 2024, including top performers like Nvidia, Constellation’s strong market position and attractive valuation make it worth a second look.

With a P/E ratio of just 13 and significant growth potential, Constellation Brands may offer long-term value for those willing to take on some risk. If you believe in the company’s ability to weather industry challenges, this could be a promising addition to your portfolio.

Conclusion: Should You Invest in Constellation Brands?

While Warren Buffett’s investment in Constellation Brands reflects his strategy of buying undervalued companies with strong growth potential, it’s crucial to consider your own investment goals and risk tolerance before making a purchase. With a competitive edge in the beer market, innovative products, and a strong brand portfolio, Constellation could be well-positioned for future growth.

If you’re looking for undervalued stocks with strong long-term potential, Constellation Brands may be a smart choice. But remember, as always, perform your own due diligence and consider all factors before investing.