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Diageo Plc (DGE)

|Includes: Diageo plc (DGEAF)

Air-con city ice-cream boy (ACCICB) was the one who inspired me to set up this blog as he's constantly asking me about stocks. Which is strange since he has been investing since like more than a decade ago and I had only bought my 1st stock 1 year ago.

Obviously, he was not keen to hear that I'll be sharing my thoughts on a blog and tried to dissuade me by showing me what other bloggers have done on such topics. I told him that I am not going to be writing the way analysts/bloggers do, by breaking down into the financials, the ratios, fair value, PE etc. If people are interested in the financials, there are tons of free analysts reports on the stocks I cover anyway. I am going to do it in Googirl style which is simple, easy to understand and relate and backed by research and common sense.

Of course he was going on about me whiling away my time watching romantic Korean dramas and not putting my intelligence to good use. I think he wants me to provide him with research reports on my stock picks but which he vehemently denies is his intention. According to him, my recommendations are right very often and he had and is making money as we speak. But it's not all me I feel as he's the technical guy who reads the charts and sees when it's best to enter and exit. Plus, we have disagreements on the stocks I recommend as well which leads me to Diageo plc which has been pretty much in the dumps lately.

We argued over this stock and I bought it with my fake money via TradeHero. I was torn between this and Pernod Ricard SA (RI.PA) and would have bought both if I had enough fake moolah. This industry is indeed difficult and challenging especially in times like this. I first highlighted stocks in this industry about a few years back when it was doing pretty ok but it once again caught my attention in recent times. Given the dismal earnings reports by Diageo due to the current and ongoing China clampdown on luxury gifts and lavish spending, it is not surprising to see it being in the dumps. This to me, represents opportunity to buy at the low and hold it for mid term at least to harvest the capital gains.

Point to note would be that DGE is listed on both LSE and NYSE, I choose to buy the LSE version as it is less subjected to FX swings and fluctuations. Sadly, I did not manage to buy at the low as I bought at GBP1835 and it's currently at GBP1819. However, I think that the stock will rally given time and that's because fundamentally the company is great.

It has excellent brands such as Johnnie Walker, Captain Morgan, Smirnoff, Shui Jing Fang, Baileys, Hennessy etc. I like that it is represented in 3 categories (spirits, beers and wines) although it is in spirits that is the key contributor to DGE. Despite the recent interest in hand crafted beers and now I read even vodka is beginning to see new upstarts, the spirits sector is going to be under pressure for those items that have a relatively short or no waiting time.

Unlike cognac and wine for example that tastes better as it ages, vodka and beer does not taste better if you drink it now or years later. Which means your cash flow comes under pressure if you are a cognac or wine maker as you have overheads to pay but it would make more sense to hold part of your inventory for sale at a later stage. This in a way is a deterrent for young upstarts and for this reason I believe there's still reason to buy into DGE.

I also liked the fact that DGE owns Shui Jing Fang which is a popular brand of baijiu in China. Although sales have been dismal in China, DGE made a smart move by launching Shui Jing Fang in UK and I'm sure other countries will follow, to make Shui Jing Fang an international brand. This totally makes sense as the number of Chinese around the world would probably like to have some baijiu as part of their gift giving and celebrations. They would probably have to make up sales in other countries as opposed to being solely concentrated on China.

Last but not least, DGE's recent control of United Spirits Ltd is an excellent long term move for DGE and it would be a major contributor to DGE's bottomline in years to come. My take is to hold DGE for a couple of years at the most to realize the capital gains. I would update my holdings in time to come.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This blog post was written on September 2014