Why the Diageo share price is down 12% in a week

Jon Smith explains why the Diageo share price is underperforming at the moment, but why this could be a time to think about buying the dip.

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When the Diageo (LSE:DGE) share price hit 52-week lows in early October, I thought that the stock was entering oversold territory. Yet November isn’t going to plan for the global drinks giant. The stock is down 12% over the past week and is now down 21% in the past year. Here’s what’s going on.

A financial blip

The recent weakness stems from a trading update. At the end of September, the firm outlined that the financial outlook was on track to be hit. This said that there would be an improvement in organic net sales growth.

The later update said that this now isn’t the case. It flagged up lower growth primarily due to a “materially weaker performance outlook in Latin America and Caribbean”.

For reference, this region contributes 11% of the global net sales value, so isn’t something to be ignored. As for the reasoning behind this, the report commented on “lower consumption and consumer downtrading”.

Given that the business had been doing well financially, this curveball shocked investors. That’s one reason why the share price dropped as investors digested this news over the course of the week.

Compounding issues

The share price had been struggling even before this news came out. The sad death of long-time CEO Ivan Menezes has created a large hole in the management team.

Even though COO Debra Crew is an experienced replacement, Menezes drove the business for over a decade. It’ll naturally take some time for the strategic direction to play out under the new leadership.

Another factor to consider is investor sentiment. Over the past week, global stock markets have jumped on the back of lower inflation releases from both the US and the UK. During times like this, growth stocks tend to outperform, while defensive stocks like Diageo often underperform.

Value is definitely there

When I wrote about the firm earlier in the summer, I mentioned that I’d favour investing in small amounts over coming months. That way, if the share price kept falling (which it has done), an investor would be able to average-in at lower prices.

I still believe this is the best strategy for the long term with Diageo shares. Even though the share price is falling, I think it’s a fundamentally sound business. In a recent presentation, the CEO flagged up that the industry is still growing. Not only that, but client sentiment is strong. From its own research, the team showed that 76% of customers won’t change what they spend on things that they love.

I’m confident that growth in other geographies can offset the LatAm blip. Further, when Debra Crew has proven herself as a worthy successor, I think investors will be a lot more confident to consider buying the dip in Diageo shares. After all, that’s what I believe this is — just a dip.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. 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.

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