Fundsmith Equity portfolio manager Terry Smith has a great long-term track record in the stock market. His record’s so good that many people refer to him as ‘Britain’s Warren Buffett’. Last month, Smith offloaded a well-known FTSE 100 stock that Fundsmith had been holding for years (and one I’m invested in personally). Here’s what we know.
Farewell to a Footsie legend
The stock Smith sold was alcoholic beverages giant Diageo (LSE: DGE). It’s the owner of Johnnie Walker, Tanqueray, Smirnoff and a ton of other popular spirits brands (it also owns Guinness).
We don’t know the exact share price Smith sold the stock at. However, given that Diageo traded at between 2,419p and 2,473p in August, it would have been somewhere between these levels.
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Why the sale?
Now, Smith doesn’t give much away in his monthly factsheets. So right now, we don’t know why he sold the stock (we’ll probably find out more in his annual letter published in early 2025).
But one reason could be that he doesn’t feel the company’s capable of generating the same level of growth it has in the past. Today, Diageo’s facing a multitude of headwinds including a global consumer slowdown, a shift in attitudes towards alcohol, the rise of GLP-1 weight-loss drugs like Wegovy (these can reduce desire to consume alcohol), and economic weakness in China.
Another reason could be that he simply sees better investment opportunities elsewhere today. Indeed, there are a lot of businesses currently performing well and delivering strong returns for investors. Diageo shares however, are going nowhere fast. I said recently I believe they may actually be ‘dead money’ for a while, given the challenges the company’s facing.
Sell rating
It’s worth noting that Smith’s not the only one who doesn’t have a bullish view on Diageo shares at present. Currently, analysts at Deutsche Bank say the stock is their ‘least preferred’ in the European beverages industry. They have a Sell rating on it and a price target of 2,430p (roughly the share price now).
Interestingly, the analysts – who prefer the beer sector over the spirits industry right now – have said the spirits slowdown might be more of a ‘structural’ issue. They don’t expect the US spirits market to return to the 4-6% growth rate achieved in 2000-2019, and instead see 2-4% growth as the more likely outcome.
Bulls vs bears
Of course, plenty of investors do remain bullish on the stock. UK fund manager Nick Train’s one example here. He recently said that he wouldn’t even consider selling it at current levels. He believes it’s worth far more given the company’s formidable brand power.
My view
Personally, I’m on the bullish side too. I do acknowledge the risks here. In the short term, Diageo’s facing a challenging backdrop due to the issues mentioned above. However, taking a five- to 10-year view, I think the shares are capable of providing solid returns when today’s dividend yield of 3.3% is factored in. So I’ll be holding on to my shares.
