Measuring wine stock performance
William R. Wallace
Analyzing publicly traded wine companies can be quite daunting not only in terms of methodology but also in terms of definition. For example, what is a publicly traded wine company? In the standard lists of wine organizations, we see companies such as Seagram whose non-beverage revenues exceed those from wine and spirits. Also, is it fair to include a retailer (Geerlings & Wade) in the same group as a vineyard (Scheid)? These thorny issues aside, we decided to examine the usual list of suspects as grouped in the chart. Because of statistical aberrations, we chose to eliminate from the chart Golden State Vintners, R. H. Phillips, and Diageo (in a former life known as Grand Metropolitan).
The results of our methodology paint less than a pretty picture over the near term of publicly traded wine companies, compared with market indices of public companies, from a risk and reward standpoint. Risk and reward are the key elements of the examination process. To focus on reward and ignore risk creates a biased analysis. For example, would a prudent investor buy a stock which is forecast to out perform a major market index by a factor of 2 if that stock’s risk is 8 times that of the index? Probably not.
The methodology we use harmonizes risk and reward. It was developed over 35 years ago by Emory Richardson, a managing director for the San Francisco investment advisory firm, Hutchinson Richardson, LLC. Mr. Richardson, who holds an advanced degree in electrical engineering, also was a portfolio manager for Wells Fargo Investment Advisors and a market analyst with Fidelity Management.
Predicted Risk Adjusted Relative Performance Over the Next 3 to 6
(Data compiled December 2, 1998)
Standard & Poor’s 500 Index 13.3%
New York Stock Exchange Composite Index 0
NASDAQ Composite Index -0.7%
Wilshire 5000 Index -2.1%
Willamette Valley Vineyards (WVVI) -4.4%
Robert Mondavi Corp. (MOND) -9.5%
The Chalone Wine Group, Ltd. (CHLN) -10.5%
Beringer Wine Estates (BERW) -16.3%
Geerlings & Wade, Inc. (GEER) -17.7%
Canandaigua Brands, Inc. (CBRNA) -19.2%
Todhunter International, Inc. (THT) -19.3%
Scheid Vineyards, Inc. (SVIN) -21.0%
Vina Concha y Toro ADR (VCO) -24.0%
Fortune Brands, Inc. (FO) -25.6%
Louis Vuitton Moet Hennessy (LVMHY) -32.7%
Seagram Co. Ltd. (VO) -40.8%
Mr. Richardson observed that investors transacting shares of publicly traded companies can be separated into three categories: 1. motivated buyers; 2. motivated sellers; and 3. indifferent buyers and sellers. This latter group, for example, engages in transactions for the sake of portfolio diversification, hedging, or other factors unrelated to specific attributes of attractiveness or unattractiveness for the specific security. Using a market elasticity approach combined with other quantitative methods, the examination process estimates the likelihood of a stock outperforming or under-performing another stock or a market index. Once the reward side of the equation has been determined, the risk elements can be addressed (for you statisticians, risk is the standard deviation of reward) and an overall risk/reward rating can be assigned to the security.
The chart above ranks and compares our wine stocks with each other as well as to 4 major market indices. The Standard and Poor 500 is an index of 500 stocks, most of which (91%) trade on the New York Stock Exchange and possess a total market value of $8.9 million. The New York Stock Exchange Composite is comprised of the almost 3,100 companies traded on the NYSE. The Wilshire 5000 Index measures the performance of all U.S.-headquartered equity securities with readily available price data. Over 7,000 securities comprise this index. The NASDAQ Composite Index tracks the performance of 8 industry groups representing 4,940 stocks. The S&P 500, the Wilshire and the NASDAQ indices’ risk/reward ratios were calibrated to that of the New York Stock Exchange.
The most important aspect of the chart is the rank order of the stocks and indices. As you can see, our portfolio of wine stocks is forecast to under-perform the four market indices over the next 3 to 6 months on a risk adjusted basis. The percentage of under-performance may vary somewhat from stock to stock. It is interesting to note that the three pure wine stocks (Mondavi, Chalone and Beringer) are grouped fairly closely towards the top of the list. The strong performance of Willamette Valley was a bit of a surprise and the stock is continuing to show strength since the first part of October. Another ranking of interest is the low score for Vina Concha y Toro which appears to be running out of steam.
We will provide a review of this analysis in the April issue of Wines & Vines. At that time we will see if the wattage of our crystal ball needs adjustment.
(The above on analyzing publicly-traded wine companies was developed by William R. Wallace, who has been involved in the wine industry for more than 30 years. At present, he is affiliated with the San Francisco brokerage firm of Thomas R. White & Co.)
Grower Income Down
Gross income for California winegrape growers will be sharply down as a result of the 1998 harvest, according to a report in “The Crush,” the newsletter of the California Association of Winegrape Growers. The late harvest combined with a 25% drop in the crop will cut total gross income for winegrape concentrate and Thompson Seedless grapes from $1.94 billion in 1997 to $1.45 billion in 1998.
Rodney Strong Buys Vineyard Site
Rodney Strong Vineyards has completed the purchase of a 300-acre hillside site east of Asti in the upper Alexander Valley, according to winery Chairman Tom Klein. Klein said the purchase price was $3.5 million. He said that about 150 acres of the site was plantable. He said that 62 acres had been planted to Cabernet Sauvignon in 1996 and 1997 by the previous owner and he expected to plant the remaining 88 acres to Cabernet Sauvignon, Cabernet franc and Merlot.
John Thacher, president and winemaker at Cuvaison Winery in Napa, said the winery has acquired the 170-acre Brandin Vineyard in the Mount Veeder region of Napa. He said the site will be planted to 40 acres of Cabernet Sauvignon and small amounts of Zinfandel and Syrah. The vineyard is currently planted with 12 acres of 65-year-old Zinfandel and Mourvedre, currently being taken by Peter Franus Wine Company.
Legislative developments, including legislation on direct shipments, made news in at least two states last month. In New Jersey, the legislature has four direct shipping bills, one of which makes such shipments a felony. The first possible date for action is Jan. 21. In Illinois, a bill proposed by William Wirtz, owner of both the Chicago Blackhawks and a distributorship, would have provided franchise protection in the state. The Illinois House of Representatives passed the bill but the Senate did not hear the bill prior to adjournment. However, the bill could be heard by the Senate Jan. 11. “Capital Fax”, a publication read by Illinois legislators, noted Wirtz may have made a mistake in enlisting so many lobbyists in his last-ditch effort. The publication also said he failed to hire any public relations people to convince media that his was not a “naked display of might.”
RELATED ARTICLE: China’s Wine Drinkers Going Up-Market
Chinese wine drinkers are becoming much more discerning. One result is a higher quality of imported wine. Another is a rationalization of the home market which sees many enthusiastic small producers being swallowed by emerging wine giants. Both trends are regarded as positive and were much discussed at China Wine ’98 held in Shanghai in November.
Largely unscathed by the recession gripping the rest of Asia, the consumers of China are going up-market, statistics show. There are a number of reasons given: people are more sophisticated and educated about wine; the state has run publicity campaigns against spirits; and, most significantly, the link between red wine and good health is now universally accepted as gospel.
In 1997, China imported 21 million liters of grape wine, much of it in bulk. That was double the previous year. Last year, the trend upwards continued, though at a less enthusiastic rate. At the same time, Chinese drinkers have been drinking the top range of local wines, whose output has soared. The number of wine producers has leapt from 100 to 300 since 1996. But the big players have absorbed many newcomers, leaving three major contenders in the industry.
The “Big Four” account for more than half of China’s grape wine production. Changyu, based in Yantai in northern Shandong, reported first half sales of US$72 million this year, up 131% over 1997. The other three, Great Wall, Dynasty and China Red, were also up. Changyu now has 19.4% of the Chinese market. Great Wall has 16.1% and Dynasty 15.6%.
Changyu has 10,000 acres of well-tended quality vines near Yantai. That’s not enough to begin to quench the local thirst. Although wine capacity is expected to achieve 500,000 tons (of wine, not grapes!) in 2000, officials say there will still be a big gap in supply. Those foreign bulk imports will still be needed.
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