“To say the world has completely changed over the last 1-2 months in the wake of the COVID-19 pandemic is an understatement,” says Goldman Sachs’ Bonnie Herzog in a recent note to clients. It is impossible to disagree. Wall Street has been grappling with the implications, as stock prices and valuations have tumbled due to the increased uncertainty in the face of COVID-19’s long term impact.

Herzog has been assessing the current health of the beverage and tobacco sector, and in addition to the “unprecedented uncertainty” regarding the broader economy, is worried of other possible developments.

“We are also concerned about the ripple effect on broader consumer demand as concerns about health considerations & social distancing give way to the long-term effects on the job market, wages, consumer behavior & consumer spending,” Herzog said.

Having said that, the analyst identifies a number of names in the beverage sector that are well setup to outperform as the year progresses.

We ran three of Goldman Sachs' top picks through TipRanks’ database to further gauge Street sentiment towards them. As it happens, all are Buy rated, and what’s more, the analysts forecast all to have at least 25% upside in the year ahead. Let’s take a closer look.

Boston Beer Company (SAM)

Let’s start off with one of 2020’s sturdier performers in the face of COVID-19. Although the Boston Beer Company’s share price is down by 5% year-to-date, it has fared significantly better than the overall market, considering the S&P 500’s 20% decline.

There are a couple of reasons, according to Herzog, why the company has proved resilient. SAM’s relative lack of exposure to the on-premise channel, compared to its peers, means it has taken less of a hit from the nationwide closure of bars and restaurants. 11% of SAM’s business is on premises, compared to the industry average of 16%. Furthermore, the reduction of on-premise sells is set to be countered by a strong retail/take home trend.

The second positive driver for SAM is due to it being “advantageously levered” to what Herzog claims is “one of the few ‘big’ growth opportunities in alcoholic beverages,” - hard seltzers. In its brand Truly, SAM has the No.2 position in the hard seltzer market, which the analyst believes, it is not about to relinquish any time soon.

The trend, Herzog argues, is only likely to grow. The analsyt said, “We believe the hard seltzer category is here to stay and our analysis suggests category volumes could expand 2-3x by 2023 to become ~10% of total beer consumption in the U.S., up from ~3.5% in 2019. As a strong No.2, we believe Truly could capture a significant share of this growth and our sensitivity analysis suggests every incremental 6% step-up in Truly shipment volume growth boosts SAM’s net rev growth by +340bps.”

To this end, Herzog resumes coverage of SAM with a Buy rating along with a $415 price target. The upside from current levels is 13%. (To watch Herzog’s track record, click here)

Turning now to the rest of the Street, SAM has a Strong Buy consensus rating, based on 7 Buys and 2 Holds. At $450, the average price target is set to provide upside of 24%, should it be met in the year ahead. (See SAM stock analysis on TipRanks)

Constellation Brands Inc (STZ)

Unlike SAM, Constellation Brands can’t boast of beating the market so far in 2020. The largest beer import company in the US is down by 30% since the turn of year. But like SAM, Herzog sees multiple growth drivers for Constellation, calling it “one of the most attractive stocks across consumer staples and among the rare ones levered to growth.”

Herzog argues STZ’s valuation has been unfairly punished due to the coronavirus’s impact on on-premise business (roughly 15% of the company’s beer sales) and an overreaction to its exposure to California, where stay-at-home measures have been implemented since mid-March, and, therefore, impacting sales.

But There is another problem that has just reared its ugly head for Constellation. The company owns Grupo Modelo’s - the maker of Corona beer – U.S. rights. Unlike in the U.S., beer is not considered an essential business in Mexico and Anheuser-Bush InBev, who own Modelo’s rest of the world’s rights, temporarily shut down its Mexican brewing facilities on Sunday April 5th, to help curb the spread of the virus. Constellation Brands’ CEO Bill Newlands has said the company’s Mexico plants are still operating and it has 70 days of inventory to guarantee minimal disruption, but with uncertainty currently in the air, it will be interesting to see if the plants remain open for much longer.

Nevertheless, Herzog is confident in Constellation’s long-term growth drivers. The analyst said, “We believe STZ can deliver on its growth objectives without significant degradation to its beer operating margin, which at ~39% is already very high and best-in-class. We believe, like the best CPG operators out there, STZ has multiple levers to pull to drive top-line growth while protecting profits/margins, and we expect this to happen as the company “leans into change” and leads on growth.”

Therefore, coverage on Constellation is resumed, with a Buy rating and a $165 price target, implying possible upside of 17%.

Overall, 10 Buys and 6 Hold ratings published over the last 3 months present STZ with a Moderate Buy consensus rating. The average price target comes in at $192.07, and suggests possible upside of 37%. (See Constellation Brands stock analysis on TipRanks)

Monster Beverage Corp (MNST)

The last name on our list nestles somewhere between our two previous companies. With a 15% year-to-date drop, according to Herzog, the manufacturer of energy drinks including Monster Energy, Relentless and Burn is well set up to reward investors. “Simply put,” Herzog says, “We see recent share price pressure as a buying opportunity.”

Herzog believes “strong customer loyalty & low household penetration” are reasons why the energy category “will remain resilient in the current climate.”

And according to optimistic comments from the analyst’s convenience store retailer contacts, concerns about significant less demand across the category due to COVID-19’s impact on lower traffic, are “misplaced.” Additionally, energy drink consumers are likely to step up purchases in other channels and load up on pantry items.

“In short,” Herzog concludes “we think this is being largely disregarded by the market, with shares trading at a FY21 P/E multiple of 23.5x, an -12% discount vs. MNST 1-year historical average multiple of 26.5x and a -19% discount vs. MNST’s 3-year historical average multiple of 28.9x. Most importantly, MNST’s current valuation only implies an 85% premium vs. the S&P 500 (slightly below MNST’s 5-year average premium of 86%) despite limited downside risk to growth, improving margins & an increasingly rational competitive environment.”

Bottom line, what does it mean for investors? Herzog resumes coverage with a Buy rating and a $65 price target. Expects returns in the shape of 20%, should the analyst’s thesis play out in the coming months.

Looking at the consensus breakdown, 7 Buys, 3 Holds and 1 Sell rating coalesce to a Moderate Buy consensus rating for the energy drink manufacturer. Investors will take home a 19% gain, should the average price target of $67.33, be met over the next year. (See Monster Beverage stock analysis on TipRanks)

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