A Little Wine for the Sake of Thy Portfolio

In the spirit of Aesop, we'd like to make a case for the slow and steady tortoises out there in this week's screen (with an emphasis on steady, not slow).

Call them the anti-Amazons; they are companies that may not be the speediest, but are much more predictable, based on their past performances. Unlike Amazon.com (AMZN), which continues to surprise quarter after quarter, we wanted companies that reported earnings more in line with expectations. These are our steady movers.

After all, surprises aren't always good. Amazon was a mixed bag in the latest quarter, with disappointing revenues but (on the plus side) lower-than-predicted losses. But Nokia (NOK), BMC Software (BMCS), Computer Associates (CA) and Nordstrom (JWN) really got slammed after warning that they'd fail to meet expectations.

To find the companies with steady track records, we turned to Zacks Research. We screened its database of 6,387 companies for the ones that met analysts' earnings estimates in their most recent quarters. Looking back a little further, we also asked that in the past four quarters, the company either matched or beat expectations. Then, in line with our notion that dashing ahead could lead to stumbles down the road, we weeded out the hare-like performers that posted above-average surprises.

To establish a short list of six, we also dispensed with companies that recently lowered their earnings forecasts for this or next fiscal year. Next, we demanded that the survivors have faster-than-average growth rates coupled with lower-than-average valuations. As if that weren't demanding enough, we also insisted that the surviving stocks all be endorsed by analysts with Buy ratings.

Of the six that survived all of that chopping (click here for the complete recipe), two were winery stocks. Usually, when people think of investing in wine, it requires possessing a spacious wine cellar. But wine stocks (in the other sense of the word) could provide another way in. We'll drink to that.

The potable pair on our list — Beringer Wine Estates (BERW) and Robert Mondavi (MOND) — both said they expected to meet earnings estimates for the June quarter, as each has made a habit of doing. And, predictably enough, Mondavi met its 61-cent expectations when it reported last week. Meanwhile, Beringer is still confident that it will hit its target of 59 cents a share on Thursday, according to a statement from Beringer Chief Executive Walt Klenz. Both companies have managed to stay consistent in a field that on its face seems dependent on several uncontrollable variables — namely weather, vine diseases, fluctuating prices and fluctuating demand for wine.

Still, with harvest time just ahead, fears of a rocky future for the industry have weighed heavily on Beringer and Mondavi's stocks. Wine watchers speculate that massive increases in the grape crops coming out of California's Central Valley — the output climbed by almost a ton last year to nearly four million tons — will flood the market and lead to price stagnation. That fear was reinforced by a Barron's article in late June that prophesied a "grape glut" was about to come to fruition.

That glut could particularly affect both Mondavi and Beringer, which produce popular Californian wines at lower prices. Beringer makes a wildly popular White Zinfandel. Mondavi produces some low-end table wines, such as its Woodbridge line, as well as selling expensive stuff under its own name. An oversupply of grapes could spark something of a price war in the fiercely competitive lower end of the wine market. Though Mondavi's and Beringer's stocks initially got off to a good start this year, they're down more than 20% since late January, in response to these ongoing supply concerns.

But J.P. Morgan beverages analyst John Faucher explains how well-managed wineries rise above the uncertainties. "The differences in the crop-change from year to year are less important than people think," Faucher explains. "It takes a long time for that wine to work its way through the system." So Beringer and Mondavi have been able to keep their grape pipelines flowing steadily enough to maintain double-digit volume growth, without diluting the prices. The key is the growing thirst for wine. While oversupply remains a concern, Faucher sees supply balanced by demand. Prices are increasing even as crop sizes do.

Investors haven't warmed up to these stocks, though. The unspectacular 52-week ranges on Beringer and Mondavi both seem stuck between the $40s and the low $30s. Faucher says that has to a lot with the fact that wineries are capital-intensive businesses. The companies spend enormous amounts on money on land, equipment, distribution and marketing. That leaves them with little free cash and a low return on assets, despite strong bottom lines. While that's not disastrous, it's a bit of a buzz kill.

But if these companies live up to their steady pasts, the low valuations of their stocks could be a buying opportunity. Beringer, at $37 a share, is trading for 13.8 times this year's projected earnings. Mondavi, at $32.13, is even cheaper at 10.8 times earnings. Consequently, SunTrust Equities analyst David Goldman has each stock rated as a Strong Buy. "If the fundamentals are even close to current and past indications, then investors should have every reason to accumulate positions and few reasons to sell," Goldman wrote in a note soon after the troubling Barron's article.

With the markets swinging wildly to and fro, sometimes it's nice to find a reliable performer. After all, Aesop's tortoise didn't look particularly sexy to the odds-makers. But sometimes plodding wins the race.