Investing in Chalone: Now That's Liquidity!

Also, Bordeaux prices drop, and someone's in the kitchen with Canandaigua's books.
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Chalone Wine Group (CHLN) is a stock that will drive you to drink. It's been trading at about 10 for a decade, which means that the net present value of the stock has been steadily eroding. In fact, Chalone tanked so badly on March 31 -- dropping from 10 down to 7 7/8 -- management issued a press release the next day to say they had no clue why the stock price dropped. A week later, it struggled back to 9 3/8, tanked again on April 15 (no comment from management this time) and closed Friday at 9 1/2.

I am not saying it's impossible to get a pretty good return on an investment in Chalone, it's just that you need to ignore the stock price and take your profits on the wine and goodies instead.

Say what?

Just look at Chalone as

Disneyland

for oenophiles; 100 shares buys admission to:

  • Periodic shareholder dinners and events with Chalone management held at restaurants around the U.S.
  • The use of winery entertainment facilities for private events.
  • Discounts on wine.
  • The "Wine Library," a glossy, direct-mail offering filled with an extensive list of wines, older vintages, shareholder-only wines, olive oil and accessories.
  • A modest "wine dividend" (the equivalent of 0.11 per share last year) which can be used for purchases from the Wine Library offerings.
  • Package tours to wine regions of the world, including Bordeaux.

Discounts on Chalone's domestic wines are spotty; some of the company's prices are higher than our favorite discount retailers. However, the best bargain investments can be found in Chalone's allocations resulting from its French cross-ownership. Domaines Barons de Rothschild (Lafite) owns approximately 41% of Chalone common stock, while Chalone owns 24% of Chateau Duhart-Milon, the Fourth Growth Bordeaux winery (Lafite Rothschilds owns the rest). These are a distinctly different set of Rothschilds from the Baron Philippe group who have done joint ventures with

Mondavi

(MOND)

and

Vina Concha Y Toro

(VCO)

.

Chalone stockholders can buy discounted bottles of Chateau Lafite Rothschild, Chateau L'Evangile in Pomerol and Chateau Rieussec in Sauternes. (Speaking of Sauternes,

Moet Hennessy Louis Vuitton

(LVMHY)

announced Wednesday that they were buying 64% of the world's most expensive winery in that region, Chateau d'Yquem, which will set you back at least $250 per bottle compared to Rieussec's $75 full retail. The Chalone Wine Library listed the 1995 Chateau Rieussec at $14.40. Likewise, the 1994 Duhart-Milon which sells for $19 in the Wine Library was going for $30 at normal retail.)

So let's say you bought 100 shares of Chalone at 10 and the price never changes. But let's also say you like Duhart-Milon and go through a couple of cases per year (that's a bottle every two weeks or so). Your $11-per-bottle shareholder discount is worth $264. Your wine dividend bumps that up to $275 -- not exactly a .com ROI, but respectable enough to keep on holding the stock. So the next time Chalone goes into the tank -- uh, the fermentation vat -- just open another bottle and realize that the more you drink, the bigger your ROI.

Bargain Prices On a Nice Little Chateau

Initial indications from Bordeaux show futures on 1998 Classified First Growths (the biggest names with the highest prices) are down as much as 25% compared with 1997 thanks to the continuing financial crisis in Asia, increased competition from California, Australia and Chile and overstocking by collectors in previous years. An informal, unregulated futures market operates through a network of fine wine retailers and allows buyers to purchase wine up to two years before its release. Unlike regulated futures markets, purchasers are obligated to take possession of the wine -- a lot better prospect than having a reefer truck pull up at your door with a load of pork bellies.

Stir-Fried Wine Stocks

When tech companies want their stock to go up, they tack a .com at the end of their names. Wine companies saute their books lightly and legally, move their accounting from LIFO to FIFO, trading a few million in extra taxes for the ability to insulate their earnings from wild swings on the expense side of the operations ledger.

Canandaigua

(CBRNA)

became the latest chef in the accounting kitchen, taking a $74 million one-time charge to make the move. Mondavi made the

same move last October but it really didn't help much. Analysts are hoping for better results from Canandaigua, applauding the move as a way to edge the stock toward target prices in the upper 60s. Both

Schroeder

and

Salomon Smith Barney

(which initiated coverage last Tuesday) think it should be trading at 68 rather than the fairly desultory low 50s where it's been stuck for the past three months. Canandaigua did not return a call for comment.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.