Norwegian Cruise Line's (NCLH -2.41%) CEO believes it will be at full capacity by April 2022. Motley Fool analyst Alicia Alfiere analyzes that story, discusses an ongoing dilemma investors face with their portfolios, and shares a stock on her watch list.
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This video was recorded on Oct. 6, 2021.
Chris Hill: It's Wednesday, October 6th. Welcome to Market Foolery. I'm Chris Hill. With me today, Alicia Alfiere. Thanks for being here.
Alicia Alfiere: So glad to be here, Chris.
Chris Hill: We've got travel. We're going to talk about which stocks in your portfolio you should be adding to, but we're going to start with the business of alcohol. It was a mixed second-quarter report for Constellation Brands (STZ -2.85%), the seller of beer, wine, and spirits, had profits that were solidly lower than expected. Revenue was higher and they raised revenue guidance for the full fiscal year. Let's start here. What stood out to you in this report?
Alicia Alfiere: Yeah. Well, first, revenue net sales grew five percent year-over-year to total 2.4 billion. Pretty impressive here. Interestingly enough, this growth is being driven by their core beer brands, not seltzer or alternative beverage products like we've seen for other alcoholic brands. Let's talk about their beer because I think there's some interesting things in here. Second quarter sales grew here 14 percent year-over-year, and they have seen strong growth for their core imported beer brands. Their beer business outpaced the total beer category in the high-end segment. Modelo Especial and Corona Extra have been really driving a lot of the growth here, and the company is really excited about Modelo specifically and their growth potential. They've said that Modelo Especial was the number 1 brand in the higher-end beer category and the number 1 share gainer in the entire US beer category. They have a lot of growth here. But as you said, you know what? It was a complicated quarter. The company was really dealing with some supply chain issues. They've said that one of the biggest issues for their supply chain was the strong ongoing demand that they've been seeing for their products, but they don't expect those short-term supply issues to impact their long-term goals and they're expecting more normal levels of inventory by the end of the year. Those are some positives that we've been seeing here
Chris Hill: Yeah. I think this is a tricky one because Bill Newlands took over as CEO late spring of 2019. It was clear pretty quickly that he was going to be doing things differently than the previous CEO. I'm not trying to make excuses for him, but he was starting to execute on that plan and the pandemic hit. I think if you're a Constellation Brands' shareholder, this is a stock that over the past year is up a bit. Over the last five years, really trailing the market. I think unless you really need the money, this is one that you hold on to and you give Bill Newlands another year or so, don't you? Just because it seems like, I don't own shares, but unless I really needed the money, I think I'd want to give this guy at least one more year to see what he can do.
Alicia Alfiere: Yeah, absolutely. They talked a little bit about his plan for capital allocation, which is really important here. They're going to be focused on paying down debt, reinvesting in the business so they could have an expansion in production capabilities, which is important to meet demand, and, and this is really interesting, they've committed to returning five billion to shareholders through share buybacks. They've said that they are buying them at advantageous prices because they believe the share price is undervalued and also by giving dividends. They've estimated that they're about 60 percent of the weight to this goal, which is pretty impressive. I thought that was really interesting strategy, this focus on capital allocation. Also, they've said that they're going to be exploring some of the seltzer brands and some of the innovative products there. They think that that market is going to continue to be important. Yeah, so see how they go from here.
Chris Hill: Maybe that was the plan all along pre-pandemic to get into the seltzer market in a significant way. They haven't done that yet. I think that's one more thing to see if they can pull off.
Alicia Alfiere: Yeah, and it was interesting actually. Further back, I think we saw a huge growth in the seltzer market. What Constellation talked about on their earnings call today was really interesting. They've said that there were a lot of entrants coming into this segment of the market because people are interested there, that they've seen growth, but the company is expecting that there could be some consolidation activities and that they are really going to look at adding a product that to them is highly differentiated to be able to be competitive in this area. I think it's smart growth and smart capital allocation. Like I said, I'm excited to see where they go from here.
Chris Hill: Likewise. Norwegian Cruise Line CEO Frank Del Rio says his company will have 75 percent of its ships in operation by the end of the year and 100 percent in operation by April. I don't know Frank Del Rio, but I'm much more likely to believe the first part of what he said than the second just because April really seems like it's a long way away.
Alicia Alfiere: Yeah. I mean, keep in mind that the company only relaunched their first cruise ship in late July and they've only restarted their US cruises in early August. Obviously, COVID really impacted their business. In the second quarter, revenues were 4.4 million for 2021. That's compared to 16.9 million in 2020 and 1.6 billion in 2019. That frames our discussion around COVID and the ships. Right now, they have eight ships running, they have 100 percent vaccination policy. It is possible that they could have 100 percent of their ships running by April. I think we're really going to have to take this quarter by quarter to see how it goes, if people continue to be comfortable traveling on cruises.
Chris Hill: From the standpoint of the stock, it's basically half of where it was in January of 2020. It's only slightly higher than where it was when it went public in early 2013. So it depends on how you want to look at it. You can look at this business and say, "Oh, well, they've got some room to run here," but I don't know. Do the cruise lines interest you? We're going to get into this more in our next segment, but do these businesses interest you?
Alicia Alfiere: I always try to look at companies from the standpoint of curiosity and really researching, diving into the industry, and not letting any thoughts that I have, any preconceived things that I have really color research into the industry. I think that they definitely have room to grow after COVID. I mean, this last year and a half of them has been really difficult. So it's possible that they could get back on track. What they look like in years to come, that's definitely a question.
Chris Hill: Quick programming note, it's going to be a short week for us. We are off on Thursday. So by all means, if you're not already listening to Industry Focus, Motley Fool Answers, Rule Breaker Investing with David Gardner, check those out. Our email address is [email protected] Got a great question from John Ross who writes, "Within a balanced portfolio of 20 stocks or so, say you're on a couple of stocks that have done amazing and a couple of stocks that have fallen since you first bought them. If you believe in the future of all four stocks, is it better to buy additional shares in the company that has underperformed or the company that has outperformed the expectations?" Basically, is it better to buy the dip or add to an existing winning streak? It's a great question. I personally am going through this right now. [laughs] I am looking at my portfolio. I am seeing stocks that in some cases have been cut in half from where I bought them and others that are rock solid market beaters. I've got some cash and I'm trying to decide, where am I going to go with this? To John's question, how can someone get at an answer to this?
Alicia Alfiere: Yeah. I mean, it is an excellent question. I think it's an age-old question that we're going to continue to struggle with I think in years to come as investors. I think this is always an important question to evaluate for yourself. So the argument for buying in the dip is essentially like a stock sale, and who doesn't love sales? Essentially, if you love the company at, let's say, $100 share prices, you believe in the company, you believe in the investment case, you should love it even more at $80 a share, especially if you are an investor that believes in the long-term view of things and you're all about being in the market for a long time. But there's also an argument to add to your winners, that winners will continue to win, and I say, why do you actually have to choose? I think if you believe in both types of companies and the long-term prospects of both types of companies, there's nothing wrong with continuing to invest in both. I think the most important thing is to continue to invest, get into that rhythm of saving and investing. Remember, the most important thing is time in the market, not trying to time the market to get your lowest price or whatever.
Chris Hill: Yeah. I think a reason why you would have to choose could simply come down to cash. It could just be like, look, I've got my strategy for adding to my portfolio and I've got this set amount of money. So one way to look at it is if you can only add one, add to your winner because a month or two down the line, somewhere down the line where you have more cash, there's a decent chance that the ones that have fallen below the price at which you bought them are still, maybe they're not cut in half, maybe they're only down 20 percent, but you are still buying them. You're still lowering your cost basis. One of the things I'm trying to do is to essentially just set aside the price and just try to think about these businesses holistically and almost rank them like, OK, which ones do I have the most confidence in aside from the price? It's hard to do because again, as you said, who doesn't love a sale? If you bought, that's something about the market. I mean, I know the market, the S&P 500 has hit new highs more than 50 times this year, there are still really good businesses that are trading 40-50 percent below their highs, which they hit earlier this year.
Alicia Alfiere: Yeah, absolutely. I would say always keep a list of companies that are on your watch list or you're to be invested in list and journal about those companies, follow those companies, and absolutely invest in the highest conviction companies that you have.
Chris Hill: Before we wrap up, what is one stock that is on your watch list right now? One stock that you're just like, "I haven't bought shares yet, I'm looking at this," and you don't necessarily need to go into why you haven't pulled the trigger yet, but I'm just curious what is on Alicia's watch list.
Alicia Alfiere: The number 1 company for me that's on my watch list, actually, let me rephrase. The one that comes to mind.
Chris Hill: I was about to say. Let me get a pen, I'm going to write this down. It's number 1 on your list.
Alicia Alfiere: Yes, watch list are super long, I think a company that I've been interested in learning more about is Align Technology. So the company that makes the clear plastic aligners. As a kid, I had braces and I hated them, and the market for misalignment of teeth is pretty big. So I'm interested in them. They are one of the many companies that I'm interested in researching and learning more about. How about that? How about you, Chris?
Chris Hill: Nice. I think I've mentioned this before, one that is on my watch list and I still need to do some more research on is a company that has been talked about in various Motley Fool forums, and that's Lemonade, the insurance company. Yeah. It's one I just want to do some more research on. I suppose, as we say all the time, one way to do research is to purchase stock and buy it in thirds because it's human nature just for investors to be more interested in something once you own shares of it. So I should probably just get it off my watch list and buy a couple of shares and then decide if I want to add to it later. But for now, it's still on my watch list.
Alicia Alfiere: Absolutely, or even starter positions. So smaller positions, and then you can add to it, as you said, as you learn more about the company as you deepen your conviction in the company.
Chris Hill: Alicia Alfiere, great talking to you as always. Thanks for being here.
Alicia Alfiere: Thanks for having me.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see on Monday.