Applying Graham's Checklist: A Value Investor's Look at Constellation Brands

For the disciplined investor, the search for high-quality companies trading at a discount is a classic value proposition. The Morningstar Wide Moat Focus Index provides a systematic framework for finding these opportunities. At its core, the index tracks companies that earn Morningstar's highest rating for competitive strength-those with a wide economic moat. This means firms with durable advantages, such as powerful brands, high switching costs, or significant scale, that allow them to fend off competitors for decades.

The index's purpose is straightforward: to identify the most undervalued of these high-quality stocks. It does this by ranking wide-moat companies based on how cheaply their shares are trading relative to Morningstar's own fair value estimates. As of the most recent reconstitution in September 2025, the most compelling opportunity on the list was Constellation Brands, trading 41% below our fair value estimate. The index's 10 constituents at that time represented a range of undervaluation, from 41% below fair value down to 29% below.

This disciplined approach is designed for long-term investors. By focusing on wide-moat companies with sound balance sheets, the index targets businesses with the resilience to navigate economic uncertainty. The portfolio is kept fresh through regular, semiannual reconstitutions that add the newest cheap wide-moat stocks and remove those that have become less attractive, ensuring the index remains a fertile hunting ground for high-quality ideas at bargain prices.

Evaluating a Specific Candidate: Constellation Brands (STZ)

Constellation Brands stands out as the most compelling opportunity in the Morningstar Wide Moat Focus Index, according to the framework's own metrics. As of the September 2025 reconstitution, the company was trading a steep 41% below our fair value estimate. This gap between market price and intrinsic value is the core of the value investor's proposition: a wide moat business available at a significant discount.

The strength of Constellation's moat is built on its formidable portfolio of consumer staples brands. Its leadership in the beer segment, anchored by the global powerhouses Corona and Modelo, creates powerful customer loyalty and pricing power. These are not just popular drinks; they are cultural icons with high switching costs for consumers, a classic hallmark of a wide economic moat. This brand strength has historically allowed the company to navigate market cycles and maintain profitability, providing the durable foundation a long-term compounder needs.

The value question, then, is whether the market's current pessimism about the beer segment is overdone. The 41% discount suggests deep skepticism, likely driven by concerns over shifting consumer preferences, economic sensitivity, or competitive pressures. For a disciplined investor, this is where the margin of safety is created. The market is pricing in a future where Constellation's moat erodes or its brands lose relevance. The investor's task is to assess whether that scenario is truly probable or if the company's competitive advantages are more resilient than the price implies.

The setup is a classic value test. You have a business with a proven ability to generate cash and defend its market position, trading at a price that discounts a significant portion of its future earnings power. The risk is that the beer segment headwinds persist longer than expected. The potential reward is that Constellation's wide moat allows it to compound value over the long term, even if the path is bumpy in the near term.

The Value Investor's Checklist: Applying Graham's Criteria

For the disciplined investor, a company's price alone is not enough. The true test is whether it meets a set of fundamental criteria that separate a speculative gamble from a sound business purchase. Benjamin Graham, the father of value investing, laid out a clear checklist in "The Intelligent Investor." Applying his specific requirements to Constellation Brands reveals a picture of a company that, on paper, checks several boxes for a margin of safety.

First, consider the Quality Rating. Graham recommended companies with an S&P Earnings and Dividend Rating of B or better. While the provided evidence does not contain Constellation's specific S&P rating, the Morningstar Wide Moat Focus Index itself acts as a proxy for quality. The index explicitly tracks companies with wide economic moat ratings, which are defined as firms with significant competitive advantages that allow them to fend off competitors for decades. This is a higher bar than Graham's B rating, suggesting Constellation possesses durable business strength. The company's leadership in global beer brands like Corona and Modelo is a tangible example of this moat in action.

The most compelling evidence for a margin of safety is the significant discount to intrinsic value. As of the September 2025 reconstitution, Constellation was trading 41% below our fair value estimate. This gap is the core of the value proposition. It means the market is pricing the company as if its future earnings power is substantially lower than Morningstar's analysis suggests. For a Graham-style investor, this is the kind of discount that creates a buffer against error and provides a margin of safety. The question then becomes whether this pessimism is justified by a fundamental deterioration in the business or simply a temporary market overreaction.

Finally, financial strength is a cornerstone of Graham's philosophy. He emphasized low debt loads and strong liquidity. The evidence confirms Constellation's position as a wide-moat company, which inherently includes sound balance sheets and significant competitive advantages. This suggests the company is not burdened by excessive leverage, providing it with the financial resilience to navigate economic uncertainty and fund its operations without distress. A solid balance sheet is the foundation that allows a business with a wide moat to compound value over the long term.

In sum, Constellation Brands presents a classic value setup. It operates a high-quality business with a durable competitive advantage, trades at a steep discount to its estimated intrinsic value, and possesses the financial strength to weather storms. The checklist, as defined by Graham's principles, is largely satisfied. The investor's task now is to determine if the market's deep skepticism about the beer segment is a temporary overreaction or a sign of a longer-term structural challenge that could erode the company's moat.

Catalysts, Risks, and What to Watch

The forward view for Constellation Brands hinges on a single, powerful catalyst: a re-rating of the stock as the market reassesses the company's wide moat and its long-term cash flow potential. The current 41% discount to fair value suggests deep skepticism about the beer segment's future. The path to closing that gap lies in the market recognizing that the company's competitive advantages-its global brands like Corona and Modelo-provide a durable foundation for compounding value. If Constellation can demonstrate that its pricing power and brand loyalty are intact, the stock could see a significant revaluation, bringing its market price closer to intrinsic value.

Yet, this re-rating is not guaranteed. The primary risks are persistent shifts in consumer demand and pressure on profitability. The alcoholic beverage industry faces ongoing challenges, including changing drinking habits and economic sensitivity. Margin pressure from input costs, such as raw materials and packaging, could also erode earnings if not fully passed through to consumers. Furthermore, competitive dynamics within the sector, including aggressive marketing by rivals or the rise of alternative beverages, could threaten Constellation's market share and pricing power over time.

For investors, the key is to monitor the business's operational health through quarterly earnings. The focus should be on signs of pricing power and volume trends. Can the company maintain or grow its market share in key regions? Is it able to raise prices without losing customers, a clear indicator of brand strength? These are the metrics that will signal whether the wide moat is widening or narrowing. Additionally, investors should watch for any changes in Morningstar's economic moat rating, as a downgrade would be a major red flag that the company's competitive advantages are deteriorating.

The bottom line is that Constellation presents a classic value setup with a clear catalyst and defined risks. The company's financial strength and wide moat provide a margin of safety, but the re-rating depends on the market's patience and its ability to see past near-term headwinds. For the long-term investor, the stock offers a chance to buy a high-quality business at a steep discount, but it requires discipline to hold through the volatility while watching for the signals that confirm the business's enduring strength.