Sometimes, certain industries seem to be made for small-cap investors. When this happens, Wall Street analysts would kill to be in our position. They can’t write about certain ideas, no matter how good they are, because their audience consists mostly of big mutual fund managers that can’t invest in these companies.

A perfect example of this is the craft/micro beer industry. By definition, it doesn’t ever include large beer producers. You will never find an Anheuser-Busch or a SAB-Miller on the list. A craft brewer as defined by the Brewers Association is a small, independent and traditional brewer, producing less than two million barrels of beer a year.

It is no new knowledge that the brewing industry, as a whole, has been suffering lately. Don’t worry, people are just drinking a lot more wine and distilled alcohols. But what isn’t necessarily common knowledge is how well this small section of beer producers is doing.

Craft/micro beer sales grew 17.8% in U.S. supermarkets in 2006 compared to the entire beer industry, which only sold 2.4% more beer than in 2005:

According to the Brewer’s Association, the beer industry went through a massive consolidation in the 1970s. In fact, it was predicted that there would only be five breweries in the U.S. Not only this, but all of these large companies were only producing light beer. Imported beer was not nearly as common as it is today. So, what did people do to get European style beer? They made it.

Tiny microbreweries sprung up all over the country by the early ’80s, including the Boston Beer Company, maker of Samuel Adams Boston Lager, amongst hundreds of other types over the years.

But as public companies, these craft beer companies have had an extremely short life. The first and only mainstream public company is Boston Beer (NYSE: SAM). That company went public in 1995 and really struck it big in the past six years, making over 368% profits for its investors.

Unfortunately, only a handful of these other 1,400 craft breweries are public. Of these, all of them are sold over the counter. Not one has made it to a major U.S. exchange.

So how can Wall Street ignore an industry steadily growing at 17% a year? Well, they’re not… These companies are just too small to discuss. But not for long…

One way these brewers will make it mainstream is through the form of consolidation, just like the ’70s.

Anheuser-Busch has a stake in Redhook Breweries. InBev (brewery giant, maker of Beck’s and Stella Artois) looks to acquire Ontario’s Lakeport Brewing, which is already partly owned by Canadian giant, Labatt. Miller Brewing owns Jacob Leinenkugel Brewing Company.

These big brewing companies are even introducing “craft-like” products of their own to get in on this trend. Anheuser just released a summer ale called “Beach Bum Blonde Ale,” and Miller Brewing Co. also released a new beer this summer called “Miller Chill,” flavored with lime and salt.

This desperate attempt to regain respect amongst many new beer drinkers may work. But either way, it is a great opportunity to get in on the small craft beer companies who aren’t sucked into the mega-brewers’ net just yet.

Sincerely,
Jim Nelson
July 23, 2007

P.S.: Small over-the-counter companies like these are hard to find on any Wall Street news blurb. But it just so happens that my fellow Penny Sleuth editor and penny stock guru, Greg Guenthner, has devised a way to bring this kind of “hidden market” information to you in a new service he calls Bulletin Board Elite.

P.P.S.: People are drinking more and more alternative beverages these days. But not only craft beers…people are going nuts over alternative sodas. Coca-Cola just bought the small alternative soda company Glaceau. There are tons of these small soda companies, who are just about ready to explode. Greg recently wrote a special report on this subject.

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

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