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Brown (booze) is the new black for investors

June 6, 2012: 12:58 PM ET

Diageo plans to boost production of Johnnie Walker and other whiskys to take advantage of booming demand worldwide.

Oh, show me the way to the next whiskey stock?

Jim Morrison isn't necessarily the best source of investing advice. But with economic times being as tough as they are, it is somewhat telling that there's a bull market in bourbon, scotch, rye and other brown liquor.

Shares of Beam (BEAM), the distillery that was spun-off from what used to be known as Fortune Brands (FBHS), is just one of a small group of stocks in the S&P 500 (SPX) that emerged from a brutal May with a gain. In fact, Beam is up nearly 18% year-to-date.

It's not the only purveyor of booze that's beating the broader market this year. Brown-Forman (BFB) is up 9% in 2012. Shares gained more than 3% Wednesday after the maker of Jack Daniel's reported better-than-expected sales for its most recent quarter.

And then there's Diageo (DEO). The U.K.-based producer of Johnnie Walker, Crown Royal and Bushmills is up 11% this year. The stock rose nearly 4% Wednesday on the news that Diageo was planning to invest more than $1.5 billion to boost production of Johnnie Walker and other brands of Scotch whisky.

(In case you are not a brown booze snob like me, whiskey is for American bourbon and spirits distilled in Ireland. It's whisky for anything from Canada, Scotland and Japan.)

Does it make sense for these stocks to be doing as well as they have? Yes. Sales are booming around the globe and there's been a particularly big renaissance for Kentucky's finest bourbon.

Consumer staples stocks in general tend to be viewed as safer plays in a rough market. It may be an overly simplistic argument, but consumers don't tend to pull back that much on beer, wine and the hard stuff during tough times. There are other areas where people are likely to spend less.

"Alcohol stocks hopefully won't be hurt as badly in an economy like this," said Fritz Reynolds, manager of the Reynolds Blue Chip Growth Fund (RBCGX) in Las Vegas. His fund owns shares of Diageo, king of beers Anheuser-Busch InBev (BUD) and winery and spirits maker Constellation Brands (STZ).

Related: Jack Daniel's marketing magic

Most of the booze stocks also benefit from the fact that they pay healthy dividends. Diageo, for example, sports a yield of 2.2%. Beam's yield is 1.4% while Brown-Forman has a dividend with a yield of 1.6%.

But investors have to be a little cautious. The stocks are no longer cheap. Beam has a positively top-shelf valuation of nearly 26 times 2012 earnings forecasts while Brown-Forman is trading at 22 times estimates for its current fiscal year (which ends in April 2013.) Diageo is the cheapest, at 15 times fiscal 2013 earnings targets. But that's not necessarily a bargain considering that analysts expect profits to rise 10% annually, on average, for the next few years.

Gerry Sullivan, manager of the Vice Fund (VICEX) in Dallas, which invests in so-called sin stocks like alcohol, tobacco, casinos and defense companies, said he does not own Beam yet because it is so pricey. He added that he'd prefer to wait for the company to have a longer track record as a public firm since it was just spun-off last October.

The fund does own Brown-Forman, Diageo, Anheuser-Busch and Constellation though. It also owns Molson Coors (TAP) as well as locally listed shares of European alcohol giants Heineken, Carlsberg, SABMiller and Pernod Ricard.

Sullivan said that of the four types of companies he invests in for the fund, alcohol is in the unique position of being able to hold up well during tough economic periods but can also benefit from increased sales of higher-end brands when consumers are more willing to spend.

So forget about Facebook. If you want a true social stock, the alcohol companies might be your best bet.

"Any time I go into a bar, I can probably buy one of the brands I own in the portfolio," Sullivan joked.

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Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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