Transcript
A (0:00)
Hey, it's Ryan Knudson, host of the Journal Podcast, our show about money, business and power. If you're looking for more deeply reported.
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Stories, like we share every day, consider.
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Becoming a subscriber to the Wall Street Journal. Visit subscribe.WSJ.com TheJournal all lowercase to subscribe now, small caps have been underperforming for over 10 years now. So historically speaking, we're due for an outperformance cycle for small caps.
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Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Jill Carey Hall. She's a strategist who covers small caps for B of A securities. Jill predicts a big move for small caps in 2026. Now, I know we've heard predictions like that before and that they haven't panned out recently, but I find Jill's case compelling. It has a lot to do with earnings growth. We'll talk about that. Listening in is our audio producer, Alexis Moore. Hi, Alexis.
A (1:07)
Hey, Jack.
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I received a lot of email. I always receive a lot of email from our lovely listeners. Some of our nuclear literate listeners pointed out I made a bit of a boo boo, didn't I?
A (1:20)
You did.
B (1:20)
I got. I strayed from what I should have said about uranium. I said some, some scandalous things about uranium.
A (1:28)
You said that uranium 235 and 238 have a different number of electrons when in actuality they have the same number of electrons and protons but a different number of neutrons, which I just learned.
B (1:41)
You know what? This changes everything about how I thought the world works. I gotta go back. I gotta go back to square one. I'm going back to kindergarten and I'm starting over again.
A (1:51)
I don't know if they teach that in kindergarten.
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Well, I don't want to miss anything. I don't want to miss any of the building blocks that might be important later on. No, I really do appreciate folks pointing out my mistake, and thanks for listening. We need lots of chemists and engineers on alert to make sure we're getting things right. Now, we're going to get to our conversation with Jill from BofA about small caps in just a little bit. I want to say a few words about beer. This is a delicate one because it has everything to do with immigration rates. Americans have sharply different views on those. It's an emotional issue. And what I'm about to say might sound almost frivolous in light of that, but it gets to how Wall street thinks about bad news and when we reach a point when it's already baked into results, it's something that Wall street is talking about with a company that reported earnings this past week. And it has to do with Mexican beer, Corona Modelo. The company that sells those beers is called Constellation Brands. And Constellation was one of the best growers on Wall Street. For years, the beer industry had been in a slump. Constellation had bucked that trend. These brands gained share, and the US Hispanic population was growing quickly. These were all tailwinds. If you look at the decade that ran through 2022, investors who held Constellation stock made 22% a year, versus 13% for the S&P 500 and just 4% for Molson Coors. They actually lost a bit of money in Anheuser. So that record of outperformance has now changed. In the year up until this past Thursday's earnings report for Constellation, the stock price had fallen by about one third. And there's a question that Wall street analysts and company management have kind of been alluding to maybe dancing around for about a year. Beer is by far Constellation's biggest business, and more than half of its beer customers are Hispanic. And management has talked in the past about what it would call macroeconomic concerns among these customers. I'll talk about some of those concerns in just a moment. But there's a theory on Wall street that immigration raids have had a lot to do with falling demand for Corona and Modelo. If some of these customers have been avoiding, let's say, big social gatherings where beer is typically enjoyed, maybe that's hurting. And using Wall Street's sometimes weird logic, that might be a reason to think that the worst of Constellation stock declines are over. That's what Barclays Capital wrote recently. It wrote, we heard some growing optimism behind Constellation into the close of calendar 2025, with the bull thesis anchored in the idea of lapping the beginning of ice activity in Constellations coming fiscal year that brings the company back to normal seasonality and moderate growth. By the way, Barclays is skeptical about this idea. I'll get to that, too. So what does this mean? Lapping stock? Investors care a lot about growth. If I tell you that a company makes, let's say, $100 million a year in, let's call it revenue, well, who cares? We don't know whether that's better or worse than it was doing before. If I tell you it made $80 million last year and this year it made $100 million. Now that's something. That's fast growth. If something happens to that company that, let's say it loses $10 million of its revenue, then we're going to see percentage declines. In fact, we're going to see them for four quarters. But if that thing that cuts into sales doesn't get worse from there, if the effects have already been fully felt, then we're eventually going to lap whatever caused those declines and we're going to have a lower baseline going forward and that company could return to growth. So if these high profile ICE raids, Immigration and Customs Enforcement, if they began roughly a year ago, shortly after Inauguration Day, and if they matter a lot for beer sales, that's an open question because there are definitely some other effects too. If they matter and if we're reaching the one year anniversary and if the effects have already been fully felt, whatever percentage decline may have been caused by immigration fears, that percentage decline might go away once the bar is reset lower maybe Constellation returns to growth. And that's why Barclay says it's hearing rising optimism about a stock that's been doing poorly over the past year. We did get some new comments and a new piece of evidence from Constellation Management this past week. I'll tell you about that. Let me just give you some very brief background on why we're talking about a company from New York's Finger Lakes region that's selling Mexico's most iconic beers. I've surely talked about this before in this podcast. There was a guy named Marvin Sands, and he was the son of a Queens, New York vintner. And in 1945, he took over a sauerkraut factory that had turned into a bulk winery in Canandaigua, New York. That's about a half hour drive from Rochester. And what Marvin needed was a hit brand to squeeze higher profits from his grapes. He tried kosher wine called King Solomon. It didn't really take off. But then the company struck gold. Richard's Wild Irish Rose. It's a cheap, sweet and let's say effective screw cap affair. Lots of repeat customers, and it absolutely minted money for decades. In the 1990s, Marvin's son Richard and his brother led Constellation into premium spirits and wines they would eventually dump. Rosie, as Richard's Wild Irish Rose is sometimes called, along with other cheap bottles. In 2013, Constellation struck gold a second time in beer, of all things. The parent of Budweiser AB InBev, it bought Grupo Modelo, and as part of an antitrust deal, it had to sell US Rights to Corona Modelo and the company's other brands. Constellation had limited beer exposure at the time, which Made it a safe buyer. These were really unique assets. The Corona brand at that time was this rare combination of iconic, recognized everywhere, but also woefully under marketed. And that's a fairly straightforward thing for a company to fix. Constellation's innovations include just putting the stuff in cans. The US Hispanic population was growing quickly, which helped. Remember the bud light boycott two years ago? @ that time, and I know we talked about this, Modelo became America's best selling beer. The stock returns for Constellation investors, as I said during that period, were stupendous. Okay, so what went wrong? Well, one theory is simply that Constellation has tapped its growth opportunity with Modelo. Maybe it now looks like other big brewers. In that quarterly report last Thursday, we learned that depletions, that's an industry term for brewer shipments. Those were down 4% for Modelo and 9% for Corona. They were partially offset by some smaller brands that did well, Pacifico and Victoria. But overall, Constellation's beer category fell 2.2%. However, management noted that its beer still has 20% less distribution than that of the industry heavyweights. And that to me doesn't sound like a company that has run out of room for growth. Theory two is that the stock was just priced for perfection and then perfection ended. This one definitely played a role. Shares routinely went for 22, 23 times earnings leading up to two years ago. Other big brewers back then traded at price earnings multiples, sometimes in single digits. Now Constellation Stock is below 13 times earnings. In recent years, we've seen Constellation stock fall more often than not on earnings day. But on Thursday it gained 5%. Wall street called the results good enough. Considering that the case for shares rests on a future return to normal conditions, there are some other things to look forward to. There's a World cup of soccer coming this summer. It's co hosted by the U.S. canada and Mexico. That's got to help beer sales. Okay. Theory three is that Hispanic customers are buying less beer because of economic concerns. And theory four is that they're doing so because of immigration fears. And these are difficult to disentangle. Back in April of last year, the CEO, Bill Newlands, he cited company research showing that 2/3 of its Hispanic customers were concerned about higher prices on food, gas and other essentials. And about half of them were concerned about immigration issues. He also mentioned that concerns about job losses in quote industries that have a high Latino employment base. These were leading to declines in quote efforts to go to restaurants, to have social gatherings, things that are very much beer occasions. Since then, Constellation has used mostly blanket terms to discuss what's ailing its Hispanic customers, socioeconomic concerns for example. But it's just not something that's easy to quantify. It could be a combination of two or more of these things plus other factors. Now as I say, the company did tackle this question in a more head on way this past Thursday. An analyst from TD Cowan asked, I guess what we're all kind of wrestling with is once we lap that initial shock of restrictions on immigration policy, is it possible that it just gets a little bit less bad? So instead of mid single digit declines, just theoretically with this cohort, since you're lapping the initial shock, it could be a little bit better than that. To which the CEO answered, we hope you are correct. That would be a lovely outcome. And then he offered this statistical clue. The company tracks results by zip code and compares that with the Hispanic population in those zip codes. And what it finds is that quote, with zip codes that have greater than 20% Hispanic representation. It still remains very challenging. But it says it, quote, has seen some improvement in zip codes with less than 20% Hispanic representation. And it said it's seeing a lot of volatility state by state, quote, depending on what is going on with immigration policy in particular markets. The company says it's difficult to know, so it's focused on controlling the controllables. Wall street is predicting a 16% decline in constellations earnings per share for its current fiscal year that runs through February. Next fiscal year is predicting a 7% rebound, but that estimate has been sliding in recent months. Barclay calls this immigration raid thesis for Constellation stock a trading idea, but not really a long term reason to hold the stock. It writes, quote, we could understand there being limited risk of additional headwinds from reduced social behavior beyond what has already transpired. It goes on, but we think it remains to be seen what lapping does or doesn't mean for the company at large. And that's beer and Constellation. Who wants to hear about small caps, about why to own them in 2026 and about some individual small cap stock picks that's coming next after this quick.