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.

| More on:
Group of young friends toasting each other with beers in a pub

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing For Beginners

Two gay men are walking through a Victorian shopping arcade
Investing Articles

Why does this gem of a FTSE 250 stock get less attention than it should?

Zaven Boyrazian explores a FTSE 250 stock that doesn’t get as much investor attention as others. But can it continue…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Warren Buffett’s one-sentence tip to improve stock market returns

This concise tip from Warren Buffett acts like a guiding light to follow when investing in today’s fast-paced stock market.

Read more »

Investing Articles

The Rolls-Royce share price is flying! Time to buy?

The Rolls-Royce share price is up more than 600% since October 2020, but is this just the tip of the…

Read more »

Black father and two young daughters dancing at home
Investing Articles

£2,500 in savings? Here’s how I’d aim to turn that into an £27,113 second income

Many of us have savings, or put an amount aside every month. But it's what we do with it that…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Are Anglo American shares like buying £1 coins for 50p?

Jon Smith takes a look at the falling price of Anglo American shares and asks whether they're chronically undervalued or…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could £200 of Christmas money be used to start buying shares this month?

Our writer reckons if he was a stock market novice, he could put some Christmas money to work and start…

Read more »

Investing Articles

If I’d put £10k into a FTSE 250 tracker 10 years ago, here’s what I’d have now

UK investors love FTSE 250 tracker funds. But have these products been a good investment over the long term? Edward…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

With no savings at 30, I’d use Warren Buffett’s golden rules to build wealth

Dr James Fox explains how he can use the legendary teachings of Warren Buffett to turn an empty portfolio into…

Read more »