The beverage industry probably isn't the first place you'd think to look when you're in the market for a good investment play. But that doesn't mean it shouldn't be considered. With notably high margins and universal appeal, beverage stocks might just quench your thirst for investment gains this year.

A Sip of the Industry
The beverage industry is as varied as you can imagine - from Coca-Cola (NYSE:KO) to Diageo (NYSE:DEO), the companies that make up the industry consist of bottlers, brewers, distillers and manufacturers of everything you can pour into a glass.

So, why bother with beverage stocks? Well, one big reason is the universal appeal of beverage companies. For the majority of people in the developed world, not a day goes by without consuming commercial drinks like sodas, bottled water, or juice. Recession resistance is another reason to look into beverage stocks as an investment option.

That's not to say that all beverage stocks are boring, staid investments. Indeed, there are scores of companies in the beverage space that run the gamut between blue chips - like Coke and Pepsi (NYSE:PEP) - and growth-focused nano caps - like Jones Soda (Nasdaq:JSDA). (For more on stocks as defensive plays, see Guard Your Portfolio With Defensive Stocks.)

The Olde Soda Shoppe
The allure of drink stocks isn't lost on the big-timers either. Super investor Warren Buffett, the cherry-coke-drinking Oracle of Omaha, owned 200 million shares of the Coca-Cola Company as of April 2009. Louis Navellier's fund owned a sizable stake in PepsiCo at the same time. And institutional investors had considerable positions in Molson Coors (NYSE:TAP) stock in 2009. That's right, professional investors love beverage stocks. (To learn more, read Warren Buffett's Best Buys.)

When it comes to beverage companies, there's a solid dividing line between alcoholic and non-alcoholic beverage makers. That's a split that goes beyond preference or moral conviction; the companies have significantly different fundamental attributes as well. (For another way to invest in alcoholic products, see Investing In Fine Wine.)

What Are You Thirsty For?
For starters, let's take a look at non-alcoholic beverages. Non-alcoholic beverages include makers of bottled water, sodas, juices and teas. Some of the biggest players by market capitalization include Coca-Cola, PepsiCo and Dr. Pepper Snapple (NYSE:DPS). (Read more about market power-players in Which Is Better: Dominance Or Innovation?)

What's important to remember about non-alcoholic beverage companies is the fact that there's a lot less diversification in this industry than you'll see in the alcoholic beverage industry; while you generally see a broad spectrum of target customers represented by the product offerings of a distiller like Diageo, most non-alcoholic beverage companies (with the exception of the largest players) aim for a smaller subset of customers. That means that lower-margin beverage companies (like Cott Beverages (NYSE:COT), which makes Sam's Choice Sodas) could be more susceptible to fluctuations in the economy. (Find out how to determine the state of the economy in Economic Indicators To Know.)

Alcoholic beverages can be broken down further into two main categories - beer brewers and distillers/wineries.

Of all beverage companies, beer brewers are the group with the lowest margins - in 2008, net margins for brewers averaged just 1.86%. But while margins may be thin for breweries like Molson Coors and AmBev (NYSE:ABV), investing potential isn't. Brewers tend to have lower P/E ratios than other beverage companies, and they're also an industry growing at a fast clip.

Part of that growth is thanks to the slew of mergers that took place between international brewers throughout the 2000s (and involved many major beer brands in the U.S., including Budweiser, Miller and Coors). These business combinations continue to hold the potential for cost savings and revenue growth that could prove profitable for investors. (For more, see The Wonderful World Of Mergers.)

Last up are the distillers/wineries, which include companies like Diageo and Constellation Brands (NYSE:STZ). These companies produce liquor and wine, which generally enjoy the highest margins of all beverage stocks. As with brewers, mergers and acquisitions have been a big part of distillers' and wineries' growth strategy in recent years. In fact, most large alcoholic beverage companies own brands that span both groups (Diageo owns both liquor brands like Smirnoff and beer brands like Guinness).

Easy to Swallow
Diversification is one of the principal reasons for investors to consider adding beverage stocks to their portfolios. Not only do almost all large beverage companies own a number of different brands, many are also involved in businesses throughout the world.

In an ever-increasing global economy, the impact of overseas operations is certainly something to consider, particularly when it comes to how overseas operations are reported in the financial statements. Multinational corporations have to account for exchange rate risks along with many macroeconomic factors in their business dealings. Quite often, currency appreciation or depreciation can have a profound effect on earnings. Globally diversified companies can have significantly positive or negative effects on an investor's portfolio - it's all a matter of understanding the risks involved before your money gets involved. (To read more on global diversification, read Taking Global Macro Trends To The Bank.)

The Last Drop
Even if the beverage industry wasn't on the top of your investing shortlist, there are scores of beverage stocks that can offer some real benefits to your portfolio. Investors thirsty for some diversification and potential upside in their portfolios should consider adding a different kind of "liquidity" to their stock stables. (For more about stocks that can keep you afloat in a recession, see Industries That Thrive On Recession.)

Related Articles
  1. Insurance

    Warren Buffett: The Road To Riches

    Find out how he went from selling soft drinks to buying up companies and making billions of dollars.
  2. Investing Basics

    Sinful Investing: Is It For You?

    Sin stocks may seen outright undesirable to some, but these "naughty" industries bring stable returns - even in hard times.
  3. Mutual Funds & ETFs

    4 Mutual Funds Warren Buffet Would Buy

    Learn about four mutual funds Warren Buffett would invest and recommend to his trustee, and discover detailed analysis of these mutual funds.
  4. Stock Analysis

    Markets Are Tanking: Time to Buy Like Buffett

    Learn about three value stocks Warren Buffett holds in his portfolio. See how Buffett uses market declines to find good deals on stocks.
  5. Investing

    Procter & Gamble Restructures, Sheds 100 Brands

    All businesses face adversity, and Procter & Gamble is no exception. We take a look at recent developments affecting this global giant.
  6. Professionals

    Hard and Soft Due Diligence: What's the Difference?

    Learn about the differences between "hard" and "soft" due diligence in a mergers and acquisitions deal (M&A) and why soft diligence is increasingly important.
  7. Stock Analysis

    How UPS Plans to Benefit from Its Coyote Acquisition

    Understand the business models of UPS and Coyote Logistics. Learn about the top four ways in which UPS will benefit from the acquisition of Coyote Logistics.
  8. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  9. Stock Analysis

    The Biggest Risks of Investing in Berkshire Hathaway Stock

    Learn about the risks of investing in Berkshire Hathaway. Understand how issues of succession, credit downgrade risk and increased regulation could hurt it.
  10. Economics

    The 4 Countries That Produce the Most Chocolate

    Discover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
  1. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  2. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>
  3. What are some ways to make a distribution channel more efficient?

    While there are many ways to make a distribution channel more efficient, the three high-level ways to increase the efficiency ... Read Full Answer >>
  4. How is a tender offer used by an individual, group or company seeking to purchase ...

    A tender offer is made directly to shareholders in a publicly traded company to gain enough shares to force a sale of the ... Read Full Answer >>
  5. How does a company record profits using the equity method?

    A company that invests in another company and has majority control of it would record profits using the equity method. This ... Read Full Answer >>
  6. How does horizontal integration allow companies to share resources?

    In a horizontal integration, a company either acquires another company or merges with that company. This allows the resulting ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!