Alcohol Stocks: Road Trip—Part Four

 

American Midwest Road Trip—Part Four

The Best Wine in Missouri?

Alcohol Stocks

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Welcome to the fourth installment about my recent 17-day, 4,218-mile road trip to and through the American Midwest and back—which I’m presenting not chronologically but thematically.

Today’s theme is wine—American wine—with a focus on the grapes that originated in America. (Plus alcohol stocks—at the end.)

The Vikings, as you may have learned from your history teacher, originally called this new land they discovered Vinland, after the native grapes they found here. Most likely—though there is some disagreement—they were referring to what we now call Newfoundland.

They called the wine great, but modern palates would probably disagree.

Centuries later, the early colonists of Virginia and the Carolinas tried making wine from the various native grapes they found there. But their wine didn’t compare to the good stuff being made back in the Old World.

Still, people kept trying; after all, it’s generally easier to grow a native varietal than ones you import. And by 1855 Ohio was the leading wine-producing state in the country, with some 1,500 acres in vineyards, followed by Missouri and Illinois.

But in the 1860s, vineyards in the Ohio River Valley were attacked by black rot, and while some winemakers moved north to the Finger Lakes region of western New York, a successful industry developed in Missouri, along both shores of the Missouri River west of St. Louis. By the end of the century, Missouri was second to California in wine production.

At the same time, British botanists who’d been collecting the hardy American grape varieties introduced them to Europe.

Now here’s the interesting part.

Those American vines were—and are—a diverse bunch. They include:

  • Vitis labrusca, the Fox grapevine, native to the eastern U.S. and Canada.
  • Vitis riparia, the Riverbank Grapevine, native to the entire eastern U.S. and north to Quebec.
  • Vitis aestivalis, the Summer Grape, native to the eastern U.S.
  • Vitis rotundifolia, native to the southeastern U.S. from Delaware to the Gulf of Mexico.
  • Vitis mustangensis, native to Louisiana, Texas and Oklahoma.
  • Vitis rupestris, the Rock grapevine, native to the southern U.S.
  • Vitis vulpina, the Frost Grape, native to the eastern U.S. and west to Nebraska, Kansas and Texas.

But those European wines, diverse as they were—and are—all belonged to one species, the Vitis vinifera species. This one species is responsible for red wines, like Aglianico, Bordeaux, Chianti, Montepulciano, Nebbiolo and Priorat, as well as whites, like Gruner Veltliner, Muscat, Riesling and Sauvignon Blanc.

When those American vines got to Europe, they brought with them a tiny aphid-like insect named Phylloxera that feeds on the roots and leaves of grapevines. American vines had evolved several natural defenses to the insect, but the European vines were defenseless. As a result, within a few decades, two-thirds to nine-tenths of European vineyards were destroyed.

The solution, ironically, came from grafting the rootstocks of American vines with the scion (the important above-ground part of the plant that bears the genes that determine the fruit) of Vitis vinifera vines, and slowly, the European wine industry was rebuilt.

This was a multinational effort, and there is no single person to credit with saving the European vines, but one of the major figures was a Texan named T. V. Munson, who grafted rootstock from the wild Mustang grape (Vitis mustangensis) onto the European vines. (Note: Munson will return in this story.)

But the Europeans weren’t the only sufferers a century ago. Americans had to suffer through Prohibition, which threw the whole American wine industry into a tailspin, forcing most vineyards to close (unless they could prove a religious or medicinal need).

As the Europeans rebuilt and prospered, the Americans were reduced to drinking bootleg "jug wine" and sweet, fortified (high alcohol) wine. Before Prohibition, dry table wines had outsold sweet wines by three to one in this country, but afterward, the ratio of demand had changed dramatically. By 1935, 81% of California's production was sweet wines.

As the 20th century wore on, however, tastes slowly swung back, and those European Vitis vinifera vines, sometimes hybridized with American species vines, grew more and more dominant in the American market.

Eventually, demand for the familiar tastes of those Vitis vinifera vines, combined with a rigorous focus on improving quality, led to the boom in California wines in 1970s and 1980s.

cwa061515-1

As a result, today, not only is California the dominant wine producer in the U.S., but tastes have evolved further, with the flavor of the grape frequently overwhelming the flavor of the terroir, or land, which is more pronounced in European wines.

But, as we know in the investing world, it’s when you’re on top of the world that you should beware of falling. Just ask investors in Weight Watchers (WTW), which is down 80% this year, or Lumber Liquidators (LL), down 68% or Lands End (LE), down 56%.

(Outside the investment world, look at Tom Brady, Tiger Woods and Lance Armstrong, or Dennis Hastert and Dominique Strauss-Kahn—or even the city of Detroit, which I explored in last week’s CWA.)

Which is not to say that Californians should exactly worry, but that change will continue to occur, and the biggest fool will be the guy who buys a Napa vineyard at the (wine) market top.

So what comes next?

Possibly this.

We all know that the craft beer movement has taken market share from the big boys like Budweiser in recent decades.

cwa061515-2

Similarly, though not on the same scale, craft distilleries have sparked a “farm-to-flask” movement in spirits ranging from bourbon to vodka.

So why can’t wine be next, as drinkers revolt against the increasingly corporate output that comes from California?

And, even more to the point, why can’t the leaders of this new authentic and local wine movement use native American wine species to truly stand out?

After all, wine is now made in every state in the U.S., often using native vines (now classified as American Heritage Vines).

Vox Vineyards

If wine-drinkers do take this path, and begin to seek out the most local, natural and native wines they can find, they just might find their way to Vox Vineyards, located in the rolling hills northwest of Kansas City, Missouri.

Vox Vineyards is still very small, not least because its founder, Jerry Eisterhold, still works full-time running his successful museum exhibit design company. (In fact, it was through one of our friends who owns a company that programs touch screens for museums that my wife and I were able to meet up with Eisterhold on our recent road trip and spend a pleasant afternoon talking about and drinking wine.)

But what Vox Vineyards is lacking in size, it makes up for in variety! That’s because Eisterhold, who began his vineyard 20 years ago, has grown as many as 60 varieties of grapes, all native to North America. Today he has “just” 40 and his goal is to get that down to 20 or fewer varieties, through testing and tasting and, with each harvest, narrowing the focus to the grapes that perform best in his soil.

And the hardest part of the job might be this:

Not all of his grapes have names. But they do have pedigree, in that all of them are descended from the same American Heritage Grapes that T.V. Munson discovered in Missouri over a century ago.

The best known of Eisterhold’s grapes is Norton, the official grape of the state of Missouri.

Norton grapes (according to his website) “produce a claret-red juice and have a tough skin. This wine generally has a rich full-body with chocolate and fruit notes as well as a hint of leather. Or, at least ours does. We have found that Nortons made from different wineries vary greatly—there is no acknowledged “typical” Norton; our challenge here is to establish a benchmark of what a Norton (as we define it) should be.”

We didn’t taste a Norton; you can taste other winemakers’ Nortons all over Missouri.

But we did taste:

Cloeta (2012), which the wine’s label describes as “a jet black grape with great tolerance for heat and drought, which ripens early, producing a wine with a rich body, soft tannins and a likeable aroma of plums, chocolate and coffee.”

Chateauneuf du Platte, a blend of wines (I assume including Norton) that emulates the famous Chateauneuf du Papes of the Rhone Valley (one of my favorite regions). I thought this was delicious: rustic and chewy with moderate fruit and tannins, though lacking the dustiness and earthiness of the target wines.

Lenoir (2013), which was my favorite. Also known as Black Spanish, the grape was planted widely (as LaNoir) in southern California (before urban growth overtook the vineyards) and in France (before regulations pushed out non-European varieties). Eisterhold’s label says “this full-bodied red has deep color, rich, brambly flavor and bright acidity which makes it a perfect wine for Italian red sauces, cheeses and well-marble meats.”

Or, as my favorite local wine merchant would call it, “a great spaghetti wine.”

As a group, they were all good wines, and I hope I get the opportunity to taste them again, ideally with food.

But my most interesting observation of the wines was this. Certain aspects of them were simply unfamiliar. And to a great extent, it is familiarity that we enjoy in pretty much all aspects of life, whether it’s drinking, eating, talking with people, viewing art or watching sports.

Familiarity is comfortable, while the unfamiliar (and even more so, the exotic) takes time to be understood and enjoyed. So while I enjoyed Eisterhold’s wines, I hope I can have more time with them so I can truly love them—and watch them develop.

These are still works in progress. While Eisterhold does bottle the wines under the Terra Vox (Voice of the Land) label, they’re not available in stores yet. There are rules about selling wine and Terra Vox is not quite ready for that yet; a little more work needs to be done both establishing the precise characteristics of each grape and wine, and reproducing them consistently year after year.

But I’m confident Eisterhold will do it, and if the nascent movement to produce more local, natural and native wines takes hold as I think it might (and should), he can do for Missouri wines in the 21st century what T. V. Munson did for American grapevines in the 20th century, and earn a place in the history books.

So what kind of stock recommendation goes with wine?

Off the top of my head, I got nothing.

So I consulted our database, which yielded an amazing 270 manufacturers/distributors of alcoholic beverages—many of them Chinese.

Weeding out the alcohol stocks you can’t buy on U.S. exchanges left just 17.

And eliminating stocks with very low trading volume (typically because the majority of trading is outside the U.S.) and stocks with prices below 10 (risk is higher down there) left just eight.

At the top of list by market value was Anheuser-Busch (BUD).

cwa061515bud

Budweiser is actually still growing revenues (9% in both 2013 and 2014) but earnings growth is irregular and the stock has been underperforming the market for two years. (It does pay a 2.3% dividend, however.)

Below Budweiser by market capitalization were the other multinationals:

Ambev (ABEV) – The most exciting thing is the 4.5% dividend, but sales and earnings are declining and the stock is down 37% over the past 2 1/2 years.

Diageo (DEO) – It’s a similar story.

Brown Forman (BFA) – The company is growing, in part because it’s in spirits and wine, not beer. But it has single-digit growth, and the stock is only performing in line with the market, and only yielding 1.2%. Not bad, but not interesting enough.

Molson Coors (TAP) – The company spent $3.5 billion buying StarBev in the Czech Republic last year and seems to have overpaid, as the company recently missed earnings estimates. Equally important is the fact that TAP is heavily dependent on beer, and beer consumption is falling. The dividend is 2.1%.

Compania Cervecerias (CCU) – It’s focused on South America, and diversified beyond beer into non-alcoholic drinks, but earnings at the company peaked in 2012. The chart may have bottomed at just below 18 last year (half its peak price of two years ago), but I can’t call it an uptrend yet.

Then, getting out of the big multinationals, we have our local fave:

Boston Beer (SAM) – The company grew revenues 22% last year and is expected to grow earnings 13% this year, but its chart is poor, and the stock pays no dividend. I’m not interested.

If there’s anything these seven stories tell me it’s that the big consolidation movement of the past decade in the alcoholic beverage industry has probably run its course; a lot of these multinationals are now having digestion trouble. Also, the strong dollar is rough on those with lots of business overseas.

But there is one positive chart in the group.

Constellation Brands (STZ)

cwa061515stz

This maker of wines (Mondavi, Clos du Bois, Ravenswood), beer (Corona, Modelo and TsingTao) and spirits (Svedka, Black Velvet and Paul Masson) gets 89% of its revenues from the U.S. and 11% from Canada, so the strong dollar isn’t hurting. It grew revenues 24% and earnings 37% last year, it’s moving into China, and has acquired partial ownership of bottle-making plants, so it has real positive momentum.

But, being the last strong stock in a group that has run out of gas is not a particularly good thing. Odds are it’s only a matter of time before STZ succumbs, too. Its high leverage could be painful, and the tiny 0.3% dividend isn’t big enough to tie anyone to the stock.

So, I wouldn’t buy STZ here—but if I owned it, I wouldn’t sell it. I’d ride this horse until it stopped running.

And in the meantime, I’d keep an eye on the company’s fiscal first quarter earnings, which will be reported on Wednesday July 1 before the market opens.

Note: Some industry pools simply aren’t worth fishing in, no matter how much you like their products. To improve your odds, the best course is to target industries where business momentum is positive (like the surveillance video industry today, or network security) and then buy the strongest stock in that industry.

That’s pretty much what Mike Cintolo does every week in Cabot Top Ten Trader, where he tells his readers not only what to buy, but what price to pay, and when to sell, too!

Yours in pursuit of wisdom and wealth,

Timothy Lutts

Chief Analyst of Cabot Stock of the Month and Publisher, Cabot Wealth Advisory


Timothy Lutts can be found on Google Plus.

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