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Constellation Brands Vs. Diageo: A Good Stock Picking Study

by: Bill Cara March 27, 2007 | about stocks: DEO / STZ    
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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 (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 (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.

diageo

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 (Investertech.com) 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.

Bill Cara

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This article has 3 comments:

  •  
    Mar 27 08:00 AM
    Cara claims: "[On April 8, 2005] 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."

    A bald faced lie. Yet again, Cara dishonestly takes credit for a call which he did not make. If you go back and read his April 8, 2005 post, he had this to say about DEO:

    "Diageo, in fact, makes the Cara Global Best 100. You'd have read that before except the price of the stock at $59.59, is too high."

    www.billcara.com/archi...

    He was correct in his assessment of STZ, recommending a sell, but if you review his own words, he did not advise buying DEO, as the price was "too high."

    I am fully prepared to give Cara credit where credit is due. But in today's case, his current post consists of one part truth with one part lie.
    Reply
  •  
    Mar 27 08:06 AM
    And I should hasten to add that when Cara claims to have recommended a purchase of DEO "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," this is yet another lie. His April 8, 2005 post about DEO and STZ said absolutely nothing about purchasing DEO when the RSI-7 was "down below 30." He simply didn't say anything of the sort.

    His current suggestion that he called for the purchase of DEO when it had such criteria is another lie - a fabulous construct which shows that Cara's intention is to deceive about his track record, not to give us an honest assessment of how his call turned out. If you doubt this, go back and read the initial post, and see if you can find anything even resembling today's RSI analysis:

    www.billcara.com/archi...

    Rather than honestly taking credit for calling for a sale of STZ, he insists on adding on an entire fabrication about how he called a bottom in DEO. This is a typical Cara tactic which we have seen before and will doubtless see again.
    Reply
  •  
    Apr 06 05:54 AM
    I bought DEO at 70 and still hold it. I think the dividend will protect it against decline.... and I like Smithwick's, Harp, and George Dickel. The Johnny Walker Green is the only price that's too high.

    I think STZ will eventually recover but they are struggling integrating some new products.
    Reply
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