Warren Buffett Just Added $1 Billion Worth of This Beaten-Down Value Stock to Berkshire Hathaway's Portfolio

Warren Buffett didn't see a lot to like in the stock market in 2024. The head of Berkshire Hathaway sold over $134 billion worth of equities from the holding company's portfolio last year. The fourth quarter saw massive sales of bank stocks, including 15% of Berkshire's substantial stake in Bank of America, 73% of its stake in Citigroup, and 18% of its shares of Capital One Financial. Buffett even sold Berkshire Hathaway's stake in two S&P 500 index funds last quarter.

While Buffett's mostly been a seller in the current market, he still sees a few opportunities. Last quarter, he put over $1 billion to work in a company whose stock looks like a great value. The stock slid further in January, following a disappointing earnings report from the business, which could make an even better buy right now than Buffett's earlier purchase.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Here's why Buffett likely bought $1 billion worth of Constellation Brands (NYSE: STZ), and how it reflects his recent opinion about the stock market's current behavior.

Image source: The Motley Fool.

Buffett's star investment

Constellation Brands is the largest brewer of Mexican beer, including top-selling brands like Corona and Modelo. It also owns a wine and spirits business, but its brand strength in the category is practically non-existent compared to its beer business. Thankfully, the beer business accounts for over 80% of sales and operating income.

While the alcohol industry faces the headwind of people drinking less, especially among Gen Z, Constellation has been able to buck that trend with solid sales growth for its beer business. A combination of volume and price mix should lead to revenue growth between 4% and 7% for fiscal 2025 ending in February. That's thanks to its strong brands and product innovations like Modelo Chelada and Aguas Frescas to combat increasingly popular products like ready-to-drink cocktails and hard seltzer.

Constellation has also benefited from its scale, commanding 94% of the dollars spent on Mexican beers in the U.S. That gives it a substantial advertising budget, which it's used to improve its brands and position them as more premium options. That's enabled it to consistently raise prices and maintain its massive market share.

However, the prospect of tariffs poses a potential threat to Constellation. A 25% tax on Mexican imports would significantly knock down its pricing to distributors in order to maintain volume. On top of that, the entire alcohol industry faces the potential downside of warning labels on packaging noting the health risks of drinking, as proposed by the U.S. Surgeon General.

Constellation's strong brands, its "premiumization" strategy, and customer loyalty should enable it to navigate those challenges better than others.

Here's why Buffett may have bought the stock

Buffett's investment strategy is as simple as buying stocks when they trade below their intrinsic value, making sure you have a margin of safety, and then waiting for the stock to more accurately reflect the company's intrinsic value. In other words, Constellation Brands looks like a good value.

The famed investor bought shares of the stock before Constellation's third-quarter earnings report, which was very disappointing. Revenue was flat for the year, as a slight 3% increase in beer sales was completely offset by a 14% drop in wine and spirits sales. Management lowered its full-year outlook as a result, also noting uncertainty regarding the California market and the potential effect of tariffs.

But the selling looks overblown at this point. Management's updated outlook still calls for 10% comparable earnings growth for fiscal 2025. What's more, management has proven capable of outperforming the overall market, growing beer sales even as the rest of the industry remains roughly flat over the last decade. With its beer business now the vast majority of sales, the wine and spirits business will be less of a drag on revenue and earnings growth going forward.

The stock trades for a forward price-to-earnings (P/E) ratio of just 13 as of this writing. That's an exceptional value for a company with the competitive advantages of Constellation.

Part of a broader trend in Buffett's buys

One last thing to note about Buffett's investment in Constellation Brands. The stock currently has a market capitalization of about $32 billion. That puts the size of the company in line with the Buffett team's other purchases last quarter: Domino's Pizza ($16 billion market cap), Pool Corp ($13.1 billion), Sirius XM ($8.4 billion), and VeriSign ($21.9 billion).

When you compare that to the big stock sales last quarter -- Bank of America ($341 billion), Citigroup ($150 billion), Capital One ($76 billion) -- Buffett's showing a clear preference for smaller companies. Even his decision to get rid of the S&P 500 index funds in Berkshire's portfolio points to the likelihood that he's concerned about valuations of the largest companies dominating the index.

So, while Buffett has been selling a lot of stocks of the biggest companies, he's found value in smaller ones. For Berkshire, with hundreds of billions in cash to invest, a small company might be worth between $10 billion and $40 billion. For an individual investor, Constellation Brands may also be a great stock to buy, and those willing to do the research could find even more opportunities among small-cap and mid-cap stocks today.

Should you invest $1,000 in Constellation Brands right now?

Before you buy stock in Constellation Brands, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Constellation Brands wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $804,553!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

Learn more »

*Stock Advisor returns as of February 24, 2025

Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, Domino's Pizza, and VeriSign. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.