Richardson redux: Wine stocks and The Richardson Market Elasticity Model - Brief Article

Once again, it is time for our bi-annual review of publicly-traded wine companies using the Richardson market elasticity model.

As Wines & Vines readers may recall, the elasticity model attempts to forecast four to six months in the future the performance of a stock compared to a particular index. Historically, the model has utilized the New York Stock Exchange Composite Index; recently, the better known Standard & Poor's Index of 500 stocks, which tracks quite closely the NYSE, has been substituted.

In the April, 2000 edition of Wines & Vines, the model analyzed the stocks of 15 companies generally recognized as participants in the wine industry. Ravens-wood did not appear because the model requires two years of market data before making a forecast. Canandaigua (now Constellation Brands) is absent due to data feed errors. Because of normal publishing deadlines, the forecasts were based on a late February analysis.

In simple terms, the model seeks to inform an investor if a particular security is forecast to outperform or under-perform the S&P 500 Index and whether that performance is strengthening or weakening. Also, the model determines the security's risk and return relative to the Index and the degree of confidence the model has in its own prediction. In essence, the model attempts to predict whether a specific equity, from the standpoint of risk and return, is a more attractive investment than an S & P 500 Index fund.

The model grouped wine equities into three groups: those forecast to under-perform the Index; those forecast to outperform the Index but where performance was waning; and those expected to deliver greater total returns than the Index.

Nine companies were predicted to be either underperformers or waning performers and six achieved expectations. Concha y Toro and Louis Vuitton Moet Hennessy, both identified as waning performers, failed to keep up with the market. Seagram, Scheid Vineyards, Fortune Brands, and Todhunter International all underperformed the market as predicted.

However, three ugly ducklings actually became swans. Golden State Vintners outperformed the Index briefly in mid-June, fell off, and came roaring back at the end of August to establish a solid performance. Diageo, which in mid-March surprised analysts by announcing double digit growth in the wine and liquor divisions, has demonstrated positive comparative results. And, of course, R.H. Phillips outperformed the market the old-fashioned way by being acquired.

Six firms were forecast to outperform the Index and all did, with one glaring exception: Geerlings and Wade.

The cessation of merger talks last spring sank Geerlings & Wade. The model had forecast that GEER should outperform the market although it warned that unknown factors, as opposed to aggressive buying/selling and general market conditions, were driving performance. When Liquid Holdings walked away from the table, Geerlings & Wade began a descent which has made it the worst performing stock in the group compared to the Index.

For awhile, it appeared the venerable UST, Inc. might become another exception. A jury in Paducah, Kentucky found that the company's subsidiary, U.S. Tobacco Company, had violated the antitrust laws and awarded $350 million in damages to Conwood Company, L.P. As required by the antitrust laws, the award was trebled and a judgment in the amount of $1.05 billion was entered on March 29, 2000. The stock price collapsed; yet, in early August, the price recovered and UST has had the best comparative performance of any stock in the category.

Beringer Wine Estates, like R.H. Phillips, was proved a market star when Australia's Foster's Brewing Group decided that shares should be valued at $55.75. The announcement, coming on the heels of the Phillips merger, rallied a number of wine stocks.

Mondavi share value was a beneficiary of this merger activity but unlike some other stocks, values have remained buoyant.

Willamette Valley Vineyards and the Chalone Wine Group marginally outperformed the Index but much of that performance might be traced to wine industry merger issues.

So now, at the end of October, what's the model forecasting for the next four to six months?

In terms of bullish comparative performance to S & p 500 Index, UST tops the list followed by Fortune Brands, Diageo and Mondavi. Chalone and Golden State Vintners also are on the outperform list but the model's level of confidence in these two predictions is marginal. Also, the model indicates that Golden State Vintners' stock carries almost twice the risk as that of Chalone. Although Willamette Valley Vineyards appears on the bullish list, the model is uncomfortable with its predicative capabilities and suggests investors utilize other evaluation tools.

For wine bears, Seagram and Concha y Toro remain squarely in the under-perform column. Geerlings & Wade, Scheid Vineyards, Todhunter International, and Louis Vuitton Moet Hennessy also make the bearish list but confidence levels in these forecasts are low.

Readers should be reminded that the elasticity model is examining historical relationships between the Index and selected securities to forecast future behavior. Unexpected situations which affect stock prices such as tsunamis, mergers or outright fraud cannot be anticipated. However, subscribers to Wines & Vines are invited to visit the Internet site of Washington Mutual Financial Services (www.invest1to1.com/wmfs/isa/index.phtml) to use the model as an interactive stock analyzer to evaluate not only wine equities but also personal portfolios.

(William R. Wallace has been a contributor to Wines & Vines for the past 25 years. Emory Richardson, who has been affiliated with Fidelity Management, Wells Fargo Advisors, and is currently managing director of Genesis Capital Management, LLC, recently licensed his elasticity model to Washington Mutual Financial Services.)

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