Peter Lynch's most famous investment principle is simply, "Invest in what you know." Taking this one step further, one key to profitable investing is to buy stocks of companies you know and love.  As lovers of wine, it is therefore natural to consider investing in wine. In my first post of this series, I will discuss publicly traded wine companies.

Surprisingly I was unable to find a comprehensive list*; we engaged in the time consuming process of researching and compiling a preliminary GWS (Global Wine Stock) index of larger global wine companies and a BWS (Boutique Winery Stock) index of smaller caps. To begin with, there is the question of what is a publicly traded wine company?  I define this as a company who derives a major portion of its revenue (ideally 50% or more) from the wine business  My definition may exclude some of your favorite wineries, which may be owned by wine and spirit companies or global brand conglomerates.

While Chateau Ste. Michell, Washington State's biggest wine producer would qualify as a midcap company if an independent public company, buying its owner Altria Group (MO) with around 1% wine exposure does not by any stretch of the imagination qualify as a wine investment. The same could be said of a large global company such as LMVH, owner of brands such Moet et Chandon, Dom Perignon, Krug, Veuve Clicquot and Chateau d'Yquem, but whose non-beverage revenues far exceed those from wine and spirits (9%) .  Ditto Pernod  Ricard with Jacob's Creek, Montana, Campo Viejo & Graffigna wines, Mumm and Perrier-Joue also providing less than 10% of company  revenues from wine.

Some would argue to include major beverage companies even if they market more beer and spirits than wine such as Diageo (DEO: BV, Sterling Vineyards, Chalone, Acacia, Rosenblum Cellars and Provenance) and Brown-Forman (BF-A: Fetzer, Bolla, Korbel). Being more diversified, they may offer better risk adjusted long term returns. Be that as it may, I prefer more "pure play" wine companies.

In the large cap space, we have only five choices:
Constellation Brands (STZ), Fosters (FBRWF), Vina Concha y Toro (VCO), Sunshine International Vine (600084:CH) and Yantai Changyu Pioneer Wine Company (200869:CH). Fortunately, we do have more small and midcap choices.


ISSUES FOR WINE INVESTORS

• Today there are few pure wine plays due to extensive M&A in the beverage industry as many independent wineries were acquired in the last bull market cycle.
• The impact of ongoing global economic slowdown, especially in many advanced countries. Wine investing is linked to economic cycles and agricultural peaks and troughs
• Supply vs. Demand: There is a diminishing global over supply vs: increasing global wine consumption = wine sector is getting closer to the end of the recent grape glut.
• China today and eventually India, represent fast growth, especially at the luxury end.
• Artisan or boutique wineries vs. international or global brands.
• At some small public wine companies, the founding family is often firmly in control, owning more than 50 percent of the stock.
• Micro, nano cap and even most small cap companies are relatively illiquid. This means such investments should be viewed as a long term marriage, not a short term trade.
• Due to the high costs of Sarbanes-Oxley compliance, many boutique winery stocks do not trade on US stock exchanges.
• Currency exchange rates play an increasingly important role in wine stock selection.

TOP DOWN INVESTING
This investment approach first involves looking at the "big picture" in the global economy. Traditionally, country (currency) selection was key. However, due to globalization, this is not as large a factor as it once was. Next various sectors are analyzed in order to select those that are forecasted to most outperform the market. Finally, individual stocks are analyzed and those that are believed to be successful are chosen as investments.  

Generally speaking, about 50% of a stock's movement is due to the overall market, 25-30% to its sector membership and only 20-25% is related to the individual stock pick.
If the stock market trend is bearish, for example, most stocks will drop.  However, there are exceptions such as during the Great Depression when both gold and entertainment companies were profitable. Conversely, if the overall market trend is bullish, as well as its sector membership, these stocks are most likely to rally.

BOTTOM UP INVESTING
The valuation of an individual winery traditionally includes the analysis of several factors:
The strength of wine trademarks and trade names; market position; channels of distribution; wine market conditions; broader economic conditions; historical, current and projected financial performance of the winery; historical and current ratings from wine critics; and ownership of vineyards and other real estate assets.

Peter Lynch in ONE UP ON WALL STREET didn't advise buying the stock of your favorite store just because you like shopping in the store nor buying a manufacturer's stock because it makes your favorite product This was only the starting point. He added "Never invest in any company before you've done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion, and so forth.” However what is most important (and fun) in the bottom(s) up approach to wine investing? Obviously it should be tasting their wines! 

Also don't forget Peter advised "Devote at least an hour a week to investment research."  (I'll drink to that.) But while researching small cap wine stocks is easy and fun, it could be quite time consuming to research a large cap wine stock like Constellation Brands thoroughly without a six month sabbatical.  It is tiring to just think of all the times one would say "Bottoms up". 

Given Q1 2011 we are bearish on many stock markets, we suggest approaching new wine investing with caution. There should be plenty of time to research your future wine stock purchases.
In the meantime, isn't it nice to think the next time you buy a bottle of your favorite wine, you might also be adding to the value of your future investing portfolio! Shall we drink to that? 

Final Note:
Unfortunately, it is sad but true, that US tax laws do not currently allow for income tax deductibility for wines purchased and consumed for "investment" research purposes!
 

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           WEINGARTEN GWS 22 (GLOBAL WINE STOCK) INDEX

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NAME	SYMBOL	COUNTRY	US SYMBOL	B Units	MARKET CAP	RATING
Vina Concha y Toro	VCO	CHILE		W	large
Constellation Brands	STZ	US		W B S	large
Treasury Wine Estates	TWE.AX	AUSTRALIA	TRSYY	W	large
Dynasty Fine Wines Group	828:HK	HK: CHINA	DYFWF	W	mid/large
Suntime International Vine (Citic Guoan Vine)	600084:CH	CHINA		W O	large
Yantai Changyu Pioneer Wine Company	000869:CH	CHINA		W O	mid
China Tontine Wines	389:HK	HK: CHINA		W	mid
JLF Investment Company	472:HK	HK: CHINA		W S	mid
Tonghua Grape Wine	600365:CH	CHINA		W	mid
Delegats Group	DGL:NZ	NEW ZEALAND		W	mid/small
Majestic Wine	MJW.L	UK	MJWNF	W B S O	mid
Laurent-Perrier	LPE:FP	FRANCE	LPRRF	W S	mid	.
Lanson-BCC	LAN:FP	FRANCE		W	mid
Vranken-Pommery Monopole	VRAP:FP	FRANCE		W	mid
Bodegas Esmeralda	ESME:AR	ARGENTINA		W	mid/small
Vina San Pedro	SANPED:CI	CHILE		W	mid
Vina Santa Rita	STARIT:CI	CHILE		W	mid
Vranken-Pommery	VRAP:FP	FRANCE	VRPMF	W	mid
Laurent Perrier	LPE:FP	FRANCE	LPRRF		mid
Distell Group	DST:SJ	SOUTH AFRICA		W S	mid/large
LANSON-BCC	LAN:FP	FRANCE		W	mid
Hawesko	.HAW:GR	GERMANY		W S	mid

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WEINGARTEN BWS (BOUTIQUE WINERY STOCK) INDEX

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NAME	SYMBOL	COUNTRY	US SYMBOL	MARKET CAP	RATING
Scheid Vineyards	SVIN.PK	US		micro
Willamette Valley Vineyards	WVVI	US		micro
New Zealand Wine	NWC:NZ	NEW ZEALAND	NZWNF	micro
Lazarides Vineyards	KTILA.AT	GREECE		micro
Oyster Bay Marlborough Vineyards	OBV.NZ	NEW ZEALAND		micro
Magnotta Winery	MGN.TO	CANADA		small
Cosentino Signature Wines	MCOZ:LN	UK	CGWLF	micro
Barkan Wine Cellars	BARK.TA	ISRAEL		small
English Wine Group	EWG:PZ	UK		micro
Australian Vintage	AVG:AU	AUSTRALIA	AUVGF:US	small
Challenger Wine Trust	CWT.ASX	AUSTRALIA		small
Thang Long Wine	VTL:VN	VIETNAM		small
Brand New Vintage	BNV:AU	AUSTRALIA		micro
Vina Santa Rita	STARIT:C	CHILE		small
Australian Vintage	AVG:AU	AUSTRALIA	AUVGF	small
Bodegas Riojanas	RIO:SM	SPAIN		small
Advini	ADVI:FP	FRANCE		small
Andrew Peller	ADW/A:CN	CANADA	ADWPF	small
Sektkellerei Schloss	SWA:GR	GERMANY		small
Delegat's Group	DGL:NZ	NEW ZEALAND		small
Ktima Kostas Lazaridis	KTILA:GA	GREECE		micro
Cottin Freres	COTT:FP	FRANCE		micro
Brand New Vintage	BNV:AU	AUSTRALIA		micro
Vinedos Emiliana	EMIL:CI	CHILE		small

           

Business Unit Abbreviations: W=Wine,  B=Beer  S=Spirits O=Other
Our Market Cap Definitions:  Large: > 1B;  Mid: 200M to 1B; Small 25-200M;  Micro 2.5-25M; Nano: < 2.5M.

1 STRONG  BUY

2 OUTPERFORM

3 HOLD

4 UNATTRACTIVE

5 SELL

0 NO OPINION

SUGGESTED USE
Ideally, one buys at a value price or better, stocks with a 1 or 2 rating.  In our view, one should NOT buy price alone.  For example, just because a stock is fairly valued, if it had a 4 or 5 rating, it is best to avoid or under-weight.  However, if a stock were well below its value price and it has a 3 or better rating, it could be a profitable trade or good investment.
Remember, ALWAYS use our ratings IN COMBINATION with your own research or those of your financial advisor or broker.

NANO CAPS
AWG (Andretti Wine Group) (AWGL)
Brand New Vintage BNV:AU
Cheviot Kirribilly Vineyard (CKP:AU)
Cockatoo Ridge (CKR:ASX; CKTOF.PK)
Coonawarra Australia Property Trust (CNR:AU )
Dromana Estate  (DMY:AU)
Henri Maire  MAIR:FP
Legacy Wine & Spirits International  (LWSP)
Prince Hill Wines (PHW:AU )
360 Global Wine Company (TSIXQ.PK)

ADVANCED RESEARCH TOPICS

* Wine industry survey  This survey includes stock market performance of listed wine industry companies worldwide, updated to March 2010.
We uncovered the Mediobanca global wine industry share price index covering companies operating in the wine industry and listed on stock markets worldwide after posting our first draft.
It has been very helpful in adding substantially to our database. 
Note:  Weingarten indices classify wine companies by market cap; while the above index classify companies by sales. 

Is Wine a Financial Parachute?
ABSTRACT: This paper analyzes the relationship between Global Wine Industry Share Price Indexes and composite stock market indexes using a Threshold Vector Error Correction Model (TVECM), aiming to investigate if investments in the wine sector play a role in determining financial risk and return to investors who include it in their portfolio. Whilst most of the literature analyses the return of investments of fine wine, this paper places the focus to “normal” (i.e. non-fine) wine, using data from the Mediobanca database covering companies in the wine industry listed on regulated stock market in France, US, Australia, Chile and China . The dataset cover the time period going from January 1, 2001, to the end of February 2009. The estimates of the TVECM lead to the following results:
 i) in more mature markets, like France and the US, the presence of a threshold in the relationship between wine index and composite index permit informed investors to make gainful investments;
 ii) in less mature markets, like Chile and China, there is evidence suggest that wine is not used as a financial parachute.

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POSSIBLE FUTURE INCLUSION
600059:CH  ZHEJIANG GUYUELONGSHAN This is a large cap Chinese beverage company producing rice wine. To date we have yet to enlarge our definition of wine as made from grapes.

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WOULD YOU LIKE TO JOIN THE WEINGARTEN MAILING LIST ON WINE, ASTROLOGY & FINANCE?

Just send an email to wine@afund.com and write "subscribe" in the subject line!

Readers are encouraged to send us any public wine company omissions.
In a subsequent post we plan to rate the larger companies as well as selectively some of the small boutique public wineries.





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