Beringer, Chateau St.Jean, Etude, and Penfolds are all names that evoke an image of high quality and in the cases of Beringer and Penfolds, tremendous consistency across broad product lines. These are just some of the wineries that Treasury Wine Estates (TWE) is fortunate to own in their impressive fine wine portfolio. This raises the question: Why not invest in the stock of a company that deals with wine rather than having to deal with the perceived headaches and overhead involved in wine investing?
Recently, I wrote an extensive article about investing in fine wine as a diversification tool (click here to view). Media coverage of record wine auctions are the attention grabbers; however studies have shown collectible wines to be a compelling investment, as well as a potential hedge against traditional investments. This is the case especially in bear markets and I feel these findings strongly support looking in wine in this manner. With that said, companies such as TWE, Diageo, and Constellation offer, compared to investing in bottles, a more traditional investment play that involves wine. For the purpose of this article, my focus will surround TWE, as it’s the only pure wine play out there, the other two have substantial spirits holdings as well.
My first direct experience with TWE came when I attended a Heritage Tasting of the Penfolds line-up in Boston earlier in the year. Considering the way TWE puts on informative and aspirational events such as this for restaurateurs, shop owners, distributors, and state liquor buyers, it shows the level of class and understanding that they have. Add to this a product line that has two sensational collectibles as trophy pieces, Penfolds’ Grange and Beringer’s Private Reserve, along with a highly knowledgeable and reputable sales force (many of which are Certified, Advanced or Master Sommeliers) and TWE looks to be a compelling company. This high quality, luxury character has even attracted lustful looks from the bigger companies and private equity firms that are continually inquire about a buy-out.
That being said, investing in TWE is vastly different than investing in individual bottles of wine. When a wine is released, there is little uncertainty about the quality of the wine. The likes of Robert Parker, James Suckling and other noteworthy critics assist investors, collectors and consumers in identifying quality prior to purchase. Conversely, when a wine company is trading on the stock market, for example TWE on the Australian Exchange, there’s much uncertainty about its future profitability.
The best way to illustrate this difference is to look at TWE and their trophy wine, Penfolds Grange. A collector can confidently go out and purchase a bottle of 2005 Grange, knowing it’s of superior quality as it was rated 96 by Robert Parker and traditionally has massive demand as an investment wine. TWE, the company that owns Penfolds Grange, can’t go out and rely on analysts ratings or name recognition alone to succeed in the market place. Rather they must rely on strong sales of their full line-up, global demand for Australian and Californian wines, marketing expenses, strength of their sector, as well as a host of other variables to remain attractive to investors and profitable.
This doesn’t make TWE as a wine stock unattractive; it simply means that it has a different route to success than a bottle of one of their wineries’ wines does in the collectibles market. Understanding this fundamental difference illustrates and strengthens my argument that wine is a solid diversification tool, or even as a standalone investment. Because its quality is known, it can be effectively collected much in the same way art, stamps and other non-financials can. They’re a known substance, whereas the stock and bond markets are dynamic. This is why in bear markets it’s been shown that wine has very low correlation to traditional investments. This is why wine makes sense.
This is not a recommendation to buy, sell or hold any of this stock; however what this article was meant to do is to make wine lovers aware that there are companies out there that have significant wine holdings that drive their performance.
How about submitting some stock symbols so us techies can see past performance and news of these companies?
That constitutes a recommendation my friend, so no can do. A little digging will expose them to you quite easily. The ones named in he article are the best known, publically traded companies and TWE only trades on the Aussie Exchange.
Hope you found it beneficial.
Erol
Nice one! I hadn’t given much thought to wine company stocks as distinct from any other public company stocks, much for the reason you highlight. But maybe there is reason to consider investing in wine companies along with individual wines to create different exposure to the sector. TWE can’t rely on ratings to boost its overall value, but if Penfolds grows tremendously off the back of a series of great vintages and TWE benefits from that, there is some connection between wine quality and company value, right? Similarly, if TWE acquires only wineries making highly rated, cult status wines, that could be a reason to look favorably at TWE?
Erica,
Very thoughtful questions and I love the opportunity to comment on this further, so here goes!
TWE and other wine related companies are stocks that fall into the “Consumer Discretionary” sector; however unlike other companies, their product can vary greatly year over year. Unlike Pepsi or GAP, wine related companies have products that change annually due to the weather of any given year. This is a big factor on the high-end; however plays a very small role in the entry and mid-levels, which is where companies make a majority of their money.
For most consumers, they can care less if 2005 was a great vintage for Aussie Shiraz or that 2008 Sonoma Sauv Blancs had higher acid. Most just want a drinkable wine that suits their taste, so they buy whatever, treating it the same way they would treat buying a steak or vegetables. They largely buy what looks the most aesthetically pleasing or one that they’re familiar with. Also, a $15 wine is quickly replaced by an $8 wine when purse strings are tightened. It’s because of this behavior that these companies act exactly like a traditional Consumer Discretionary stock and rely on the market cycle, economic and company related factors. Thus, they aren’t a hedge as they’re as correlated as Apple or Budweiser.
The value add of having high-end wines such as Grange is more for name recognition and positive press among those who pay attention to wine. They’re the ones who pay attention to vintage variation and scores; however represent a small percentage of the wine consuming populous. What TWE has done, is create a successful luxury portfolio (think Coach, LVMH, etc), which act slightly different within the Consumer discretionary world and in doing so making them appear as having a higher quality product line.
When it comes down to it, pure wine investing (buying bottles of collectible wines) exploits the positive attributes of great vintages and future demand for Grange, Beringer Private Reserve, Mondavi Reserve, Opus One, etc that the company stock of the parent corporation can’t. Remember, investing in wine is about what’s in the bottle (which is known by the time auctions come around); investing in a wine related stock is about the company (which is dynamic).
Hope this answers your questions.
Erol
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