Legendary investors like Warren Buffett have long preached the importance of being greedy when others are fearful. That’s exactly the strategy I intend to follow with drinks manufacturers Nichols (LSE: NICL) and AG Barr (LSE: BAG) should their share prices suffer when the government’s levy on sugary beverages comes into force this April.
To recap, the sugar tax was announced by former chancellor George Osborne in 2016 as a way of tackling rising rates of type 2 diabetes and obesity. As a result, consumers can expect to pay more for their fizzy drink fix — the actual amount depending on the total sugar content of the drink per 100ml.
Whether the new tax will succeed in its aims is debatable. The UK Soft Drink Association has, somewhat unsurprisingly, questioned the move, stating that an equivalent tax in Mexico led only to a short-term dip in sales. If — and it’s a big “if” — events play out in a similar fashion after April, those able to pick up related stocks on the cheap could do very well indeed.
Buy on the dips
As a result of its consistent performance over the years, AIM-listed Nichols is a company I’ve admired for a while. It’s also been a hugely successful investment for long-term holders, having pretty much four-bagged in value since 2010.
That said, Nichols’ share price has suffered of late, falling roughly 25% from the peaks achieved last summer. Aside from concerns over the forthcoming tax and a slowdown in the Saudi economy (a key market), at least some of this appears to be due to recent hostilities in Yemen which have prevented the company from sending shipments of Vimto into the country.
Despite this, December’s trading update for the whole of 2017 revealed that sales were still expected to be ahead of those achieved in the previous year. Indeed, sales of Vimto in the UK were up 9%, way ahead of the 2.3% experienced by the market as a whole. Revenues from Africa were also predicted to be at least 20% higher.
Looking to the future, it stated it was confident that recent performance in the UK would continue into 2018. Perhaps most importantly, the company declared that it was “well prepared” for the introduction of the sugar tax thanks to its entire Vimto and Feel Good brands portfolio already being “below the levy threshold“. Whether the majority of market participants are aware of this is another thing entirely.
Based on its history of reliable earnings growth and dividend hikes, industry peer — and Irn Bru maker — AG Barr is another quality stock I’ll be considering in the event of any share price weakness.
Last week, it was reported that devotees of the company’s flagship product were so outraged at plans to reduce the sugar content of the drink by just over 50% (lowering the number of calories to around 70 from 140) that an online petition was launched, so far gathering around 8,000 signatures.
While some may snigger at such a response, it does show just how ‘sticky’ certain brands are and how reluctant some consumers will be to move away from their favourite drinks.
Like Nichols, AJ Barr boasts a solid balance sheet and history of achieving consistently high returns on capital. So long as any differences between its new and old recipes are negligible, I’d back it to rebound strongly over the medium term.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr and Nichols. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.