Wine portfolio still outpacing S&P

Wines & Vines, April, 2004 by William R. Wallace, Marshall G. Berol

Publicly traded wine companies seem to be attracting investors like leaky wine barrels collect fruit flies. Since the portfolio balancer (foliobalancer.com) created a risk adjusted portfolio of wine equities (W & V, November 2002), our equity value has soared by 68%. This compares to an increase of 41% for the S&P 500 Index over the same period of time. And just since our follow-up article (W & V, October 2003), the portfolio value has jumped by more than 24%.

Are the gnomes of Wall St. reading Wines & Vines? Maybe they missed the Barron's piece (Feb. 16, 2004) predicting a worsening of the wine glut.

Yet as investment in wine-oriented organizations appears to be on the upswing, several companies apparently are leaving the public arena. Joining the departed ranks of Beringer, Ravenswood, and R.H. Phillips is Geerlings and Wade (GEER). This direct marketer of cork finished product has chosen to go private. It has withdrawn its stock registration with the Securities and Exchange Commission (SEC) and is now trading in the Pink Sheets.

The Pink Sheets are a wild and woolly place for any investor. Unlike stocks that trade on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and NASDAQ, securities found in the Pink Sheets have no reporting responsibility to the SEC. Companies traded on the exchanges or NASDAQ must meet certain listing requirements, such as the number of stockholders, value of assets, profitability, market capitalization and issues of corporate governance. Additionally, these companies must file regular financial statements (quarterly and annually) with the SEC, the exchanges and/or NASDAQ. Even OTC (Over The Counter) securities--securities issued by companies that are unable, or choose not to meet exchange/NASDAQ listing standards--must file financial reports with the SEC.

Geerlings and Wade justified its actions by citing the expense and paperwork of being a public company. Unfortunately, the public shareholders have been the losers, as the stock price has declined by about 60% since the announcement.

Also considering going private is Golden State Vintners (VINT). At this time, the process has been put on hold while the board of directors ponders its options for "increasing shareholder value." Originally, the going private price was $3.25 per share, slightly below the 1998 IPO of $17.

Despite GEER's and VINT's disenchantment with the public marketplace, one newcomer apparently sees opportunity. Knightsbridge Fine Wines is now trading on the OTC bulletin board under the symbol KFWI. Founded in 2002, Knightsbridge has acquired, or is in the process of acquiring, certain assets of California's Stonegate and Kirkland Ranch wineries, Australia's Dominion Wines International and Argentina's Bodegas Anguinan Estate Winery. Don't look behind you, Constellation Brands, KFWI might be gaining on you.

Another publicly traded wine company, Asconi Corp, has improved its stature by moving up to the AMEX--and changing its ticker symbol from ASCP to ACD. When last we visited Asconi (W & V, October 2003) its stock was selling for around $4; by December, it had more than doubled. Also in December, the company raised its projections for 2003 net income by 7% and completed a private placement for the acquisition of Italian rootstock.

ACD has since retreated to the $6 range and has prompted us to rebalance the portfolio for the first time since the fall of 2002. After cranking up the Foliobalancer, holdings in Todhunter International (THT) will be reduced from 29% to 12%, and two new positions will be added.

The first new position is the warhorse of publicly traded wine companies: Robert Mondavi Winery (MOND). Not only does the Foliobalancer find the stock attractive from a technical stand-point, but a major analyst also believes the stock is a "buy" that will reach $45 by the end of the year.

The other new position is Asconi Corp (ACD). How can you not love a Moldovan winery whose primary market is Russia, yet maintains a listing on the AMEX? But more importantly, as we go to press, Asconi's shares have increased 16% over the past 30 trading days compared to a 3% rise in the S&P.

The chart on this page lists the tickers and percentage weight of each stock in the portfolio: ACD (5%), CEDC (34%), CHLN (7%), MOND (13%), STZ (12%), THT (12%), VCO (17%). For readers who organize investments by Morningstar's style boxes, 30% of the portfolio is classified small cap value, 51% small cap growth, 7% small cap core, and 12% mid cap core.

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 eliminates companies such as
U.S. Tobacco and Fortune Brands); and/or the company must appear in the
SIC (Standard Industrial Classifications) category under "wine."

Company                              Ticker  Portfolio Weight

Asconi Corporation                    ACD    5%
Andretti Wine Group (AWG)             VINE   n/a
Central European Distribution Corp.   CEDC   34%
Chalone Wine Group                    CHLN   7%
Constellation Brands                  STZ    12%
Geerlings & Wade                      GEER   n/a
Knightsbridge Fine Wines             KFWI    n/a
Robert Mondavi                        MOND   13%
Scheid Vineyards                      SVIN   n/a
Todhunter International               THT    12%
Vina Concha y Toro ADS                VCO    17%
Golden State Vintners                 VINT   n/a
Willamette Valley Vineyards           WVVI   n/a