Shares of Boston Beer (NYSE:SAM) tumbled Thursday, down more than 8% in the new year's first day of trading. The drop appears to be attributable to news that company founder and Chairman Jim Koch sold 1,000 shares at an average price of $242.63 on Dec. 27.
Large insider sales are usually a good reason to review your investment thesis and make sure it's still solid. But they're usually not a reason to sell, at least not on their own. Let's take this opportunity to have a deeper look at Boston Beer. Is this drop is a sign of tough times ahead in a market crowded with beer brewed by everyone from local brewpubs to megabrewers like Anheuser-Busch InBev (NYSE:BUD) and Molson Coors (NYSE:TAP)? Or is it an opportunity to get into a good stock at an even better price?
First, the sale
On its face, Koch's sale looks like a big deal. An insider unloading some $242,000 in stock after a big run-up raises suspicion that the stock may have gotten out ahead of itself and be in for a retreat. The Boston brewer was up 67% in 2013. And the beer market in the U.S. is growing more crowded by the month.
But on closer inspection, the company's 2013 proxy statement shows that Koch owns some 4.24 million shares of Boston Beer, or just a hair under 33% of the company.
What's more, Koch has been regularly selling off these shares. Two years ago, he was selling them for $100 apiece. That didn't stop the stock from more than doubling since then. Koch remains a dedicated, passionate founder of Boston Beer and still serves as the company's face in its advertising.
So, it looks like Koch's sales are really not anything investors with a firm belief in Boston Beer's outlook should be worried about. Which brings us to the next point: Is Boston Beer a good investment at $222 a share -- some $20 cheaper than it was when we said goodbye to 2013?
In a word, yes
With Boston Beer's fabulous 2013 now in the rearview mirror, there's good reason to be skeptical. There's a new brewer opening almost every day in the U.S., making competition for tap handles and shelf space more intense all the time. At the same time, megabrewers like A-B InBev and MillerCoors, the U.S. partnership between Molson Coors and SABMiller, are making a big push into the craft segment. They're offering their own, original labels in Blue Moon and Shock Top, buying out established microbrewers like Goose Island and Leinenkugel, and buying shares of other well-known small brewers like Craft Brew Alliance and Terrapin Beer.
That's made Boston Beer look like an odd man out. It's not small enough to have the appeal of a local craft brewer. Yet it's not large enough to have all the economies of scale working to its advantage the way A-B InBev and Molson Coors do. Nor does it have the same pricing power of those two behemoths.
But that hasn't seemed to matter. Boston Beer put up absolutely stellar numbers last quarter, crushing analyst estimates. Revenue was up 30%, year over year, more than doubling the already impressive pace of the overall craft brew market. It also reported surprising growth in its flagship Boston Lager -- 30 years old in 2014 -- which shows the strength of the brand across the U.S.
Boston Beer also remains committed to innovation, something that's key in the beer market today. Craft beer drinkers like to experiment. They like to be surprised. Sam Adams' seasonals, like Juniper IPA, and its higher-end Barrel Room Collection beers fit the bill.
Don't worry, but don't double-down
Boston Beer still looks solid, and unless we see a big downside surprise in the quarterly report at month's end, the investment thesis remains solid. That said, the stock had a great 2013, and sells at a premium. The 8% pullback provides a nice entry point, or a spot to add a few shares. But the market remains hyper-competitive, so be cautious.