Wine equity portfolio beats the S & P 500 index

When last we visited publicly traded wine companies (W&V November, 2002), investors were fleeing in droves. During eight days in September, 2002, Constellation Brands lost 21% of market value and Robert Mondavi was beginning a period in which it would shed more than 35% of market capitalization. Technical indicators suggested the smart way to make money was short selling wine stocks. It seemed the old saying was true: The only way to make a small fortune in the wine business was to start with a large one.

Yet out there in the investment community, a band of analysts--either boldly contrarian or blissfully ignorant--had taken a decidedly bullish stance on certain wine equities. Rather than dismissing these financial gnomes as deranged, we decided to take their performance-oriented forecasts and create a risk adjusted portfolio. Using the Foliobalancer[TM] (foliobalancer.com), we processed the majority of our wine stock universe (see accompanying box) to build a risk-adjusted portfolio with the highest possible Sharpe Ratio (the higher the Sharpe Ratio, the higher the portfolio's reward to risk ratio). From this process, five stocks emerged which, as a portfolio, have returned 34% over the past 11 months as compared to 22% for the S&P 500.

The big winner has been Central European Distributing, comprising 11% of portfolio assets, which has almost tripled in value this past year. Headquartered in Florida, this firm has aggressively built market share in Poland through wholesaler acquisitions. In addition to spirits, CEDC distributes familiar brands such as Robert Mondavi, Sutter Home and Concha y Toro.

Other portfolio champs were Concha y Toro, up 72% and Constellation Brands, up 22%. VCO and STZ represented portfolio weights of 17% and 14%.

Unfortunately, not all stocks were winners. Todhunter International, which announced it may return to the ranks of private companies, lost 1.5% of value while comprising 47% of the portfolio value. The Chalone Wine Group suffered a loss of just under 6%.

A new entrant to our public company universe is Asconi Corp. This organization, without a doubt, is the poster child for wine globalization. A Nevada corporation, headquartered in Florida, with vineyards and facilities in the Republic of Moldova, selling the majority (85%) of its production into Russia and trading its stock in the United States (and you thought the BRL Hardy/Constellation Brands' merger globally exotic). When Asconi gains analyst coverage, we will try to examine it from a portfolio perspective.

Now that we've looked back, let's dust off the old crystal ball and see what the future holds for our wine stock universe. Technical indicators, compared to last year, are more bullish, especially as they pertain to Golden State Vintners and Robert Mondavi. Analysts, however, are less bullish, with only Constellation Brands receiving a top score from Standard & Poor's and Todhunter International reduced to the lowest performance category by the ValueLine[TM] rating service.

Among members of the investment community, there is much interest in the Constellation Brands 5.75% convertible preferred stock issue. This preferred (STZ pfd A on the NYSE) delivers an annual dividend (paid quarterly) of $1.4375--5.75% on the original $25 per share price--and will be mandatorily redeemed on Sept. 1, 2006 for between 0.7319 and 0.8929 per share of common stock depending on the common's price. This security provides a way to obtain an income stream while sharing in the appreciation of the common stock.

Apparently this concept of wringing income streams from winery investments is being explored by several financial institutions. Recurring rumors indicate an interest in structuring a real estate investment trust (REIT) that is based upon the wine industry. REITs have become very popular over the past several years and specialty REITs are all the rage. We have prison REITs, gas station REITs, movie theater REITs; so why not a wine and vineyard REIT?

One concept we heard was for a newly formed REIT to acquire an asset base of vineyards, wineries and sales and marketing operations to generate collectively stable income streams. By distributing at least 90% of taxable income, REITs avoid double taxation with only the shareholders bearing the tax burden.

Of real significance is not the actual formation of winery and vineyard REITs. More important is the fact that real financial institutions are taking wine industry investment seriously. This may indicate that the marketplace not only believes the worst of times are over but also that stable income streams are achievable.

What a unique wine industry concept: No longer is income from Mars and wine investment from Venus.

RELATED ARTICLE: The Wine Equity Universe

To be accepted as a wine equity, company stock must trade with sufficient volume in the United States (this eliminates a number of Chilean and Australian wineries); its primary business must be wine related (sometimes a difficult issue but one which eliminates companies such as U.S. Tobacco and Fortune Brands) and/or the company must appear in the SIC (Standard Industrial Classifications) category of wine.

Company                                     Ticker Symbol

Asconi Corporation                          ASCP
Andretti Wine Group (AWG)                   VINE
Central European Distribution Corp. (CEDC)  CEDC
Distribution Corp. (CEDC)                   CEDC
Chalone Wine Group                          CHLN
Constellation Brands                        STZ
Geerlings & Wade                            GEER
Robert Mondavi                              MOND
Scheid Vineyards                            SVIN
Todhunter International                     THT
Vina Concha y Toro ADS                      VCO
Golden State Vintners                       VINT
Willamette Valley Vineyards                 WVVI

W.W. & M.B

(Bill Wallace has been an observer of, and a participant in the wine industry for more than 35 years. He is currently affiliated with a San Francisco money management firm. Marshall Berol also is involved in money management and is an investor in several wine ventures. Contact them through edit@winesandvines.com.)

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