Constellation Brands Vs. Diageo: A Good Stock Picking Study

Includes: DEO, STZ
by: Bill Cara

I am always leery when I see Financial Entertainment TV fawn over Corporate CEOs. Over the years, not long after their visit with people we know as “Television Personalities,” too many of these CEOs seem to be visiting Crowbar Hotel or, in any case, dancing to a different tune.

Do you recall the case of Constellation Brands (NYSE:STZ)?

For a while early in 2005, I thought CNBC was going to give the man his own TV show. Cramer sure loved the story. And I didn’t. So I compared the company to a legitimate heavyweight contender – a member of the Cara 100, Diageo (NYSE:DEO).

I recommended a purchase of DEO and sale of STZ; I didn’t want to pick on Cramer, I simply wanted to explain to readers how I pick companies. Anyway, both stocks were trading at about the same price that day (April 8, 2005). But today, on a relative basis, STZ (in blue) has been a disaster.

deo stz

Moreover, I wasn’t prepared to recommend the immediate purchase of DEO on that date (April 8) because the Daily RSI-7 was over 80, so I told you the price would soon look better. My long-time readers know that when I see an RSI-7 down below 30, I look for the next point of reversal, i.e., a rising RSI-7, before I’d buy.

The heavy arrows on the green RSI-7 line of the daily price series data show that just a couple days after April 8, 2005, the RSI turned down, i.e., the Distribution Alert, at about 61, and a few short weeks later, in early June, that RSI-7 bounced off the 20 line and headed north, which was an Accumulation Alert at about 55. So, when I say that traders need to have patience and let a stock of a company they like come to them, I think this is a good example.


Somehow, I don’t expect to see the Diageo CEO making the rounds of Financial Entertainment TV. But if I do, here’s what I’d expect: I’d be waiting for eager buyers to come to me because I’d be ready to sell amid the hub-bub.

In any event, you all know how much I like my Guinness, but it's time to say goodbye to DEO ($79.41). In February, the price exceeded 83. The simple version ( Monthly-Weekly-Daily values of the RSI-7 were all in the 80s at that point. I was highlighting the stock in my list of those trading at "Extreme Values." I can't do more than that.

I believe traders will be able to buy DEO in the low 70's, maybe even in the 60's later this year.

Today, the Monthly-Weekly-Daily values of the RSI-7 are 88.5/56.7/72.4. That's still extremely rich. Should there be any rally in the next week, traders will have another opportunity to sell in the low 80s.

As long-time readers know, these are good case studies.