With stocks around the world bobbing up and down in the ocean of investor confusion, we’ve stumbled on a perfect time to take up drinking…

“Sinvesting” is a theme we’ve talked about in the Penny Sleuth before. We have already covered why tobacco in emerging economies is a steal. Today, we’re raising a glass of hooch to the next-best sin play.

From the very beginning of written history, alcohol has played a significant role. In everything from Homer’s tale of Odysseus tricking the Cyclops with wine to monks brewing beer to expand and build new monasteries, alcohol has been ingrained in human history.

Booze is one cultural, social and economic staple that will not go away anytime soon. And if our global economy continues to flutter along without a significant increase in jobs, you can bet bars will do just fine.

In the past, I’ve talked about how treacherous the U.S. beer market is. Molson Coors and SABMiller partnered their North American operations in 2007. Anheuser-Busch merged with Belgium beer giant InBev a year later. This is all an attempt to maximize profits and hold off the surge of craft brewers that have grown at a rapid rate in the face of this recession.

Meanwhile, the rest of the world is still drinking as much as ever.

But the real story is in the emerging economies. China, for instance, consumes the most beer of any country in the world. But its per capita consumption doesn’t even squeak the Asian giant into the top 20. This number is growing, however. As China’s average median income continues to grow, so do its drinking stats. Already, we’re seeing annual volume consumption rates growing in the low double digits.

South America, however, has the best investment opportunities.

If you’ve ever been to or even read about the Carnival of Brazil, you already know Brazilians can drink. The same goes for the rest of the continent. As I write, businesses across South America are closed. Why? Because everyone is watching the World Cup matches — with a beer in hand, of course.

But I’m not going to recommend a traditional Latin American alcohol play like Brazil’s AmBev — a $60 billion international behemoth. Instead, I have a much smaller, out-of-the-spotlight speculative income opportunity for you today…

Chile’s Thirst Is Our Big Payout

On Feb. 27, 2010, a massive earthquake registering an 8.8 on the Richter scale rocked Chile’s western coastline. While the epicenter was located offshore, it devastated the region near Concepción — a major distribution center.

The hardest-hit sectors were fishing, forestry and heavy industry. But one often-misunderstood industry also took a beating. However, most of this industry’s problems have come from the post-earthquake reaction, rather than the actual physical damage of the quake.

Vineyards and wineries are huge players in the Chilean economy. In recent years, tourists have started coming in droves to check out local wines, take tours, partake in festivals and even export their favorites back home. This year, none of that is happening.

Sure, some local roads and distribution centers are in need of repair. But the industry as a whole is doing just fine.

The grapes weren’t affected by the quake. In fact, many are predicting this to be one of the best harvests in recent years. The numbers may not be great, but there should be strong demand for this year’s crop.

The earthquake hit some irrigation systems, but it didn’t do much damage. According to The Economist, “a cool spring and summer has increased grapes’ natural acidity. All this points to a smaller, but high-quality, vintage.”

We’re quite optimistic on the future of this industry. That’s why we’re taking a serious look at Viña Concha y Toro SA (NYSE: VCO).

Concha y Toro is the country’s largest winemaker and exporter. Its operations include everything from growing the grapes to bottling and exporting its wine to over 135 countries. Chances are, if you are a wine connoisseur, you’ve tasted a wine Concha bottled.

The company also has business in Argentina and is that country’s second largest wine producer and exporter. It sells both premium and more popular, affordable brands throughout the world.

Selling a whopping 28 million cases of wine in 2009, Concha y Toro cashed in $643 million in sales. Even after expanding its acreage and spending on production upkeep, the company was able to send shareholders a solid 89 cent dividend — nearly 31% higher than the previous year’s.

But none of this is in the news. In fact, the only piece of news about Chilean wine we see these days — and that’s after plenty of searching — is about how “devastated” the industry is after the earthquake.

What You Need to Know Before Picking up This Speculative Play

That doesn’t mean that this stock is a sure thing – serious risks are still in place (not least of which are related to Concha’s tiny size).

On their own, these risks would be worth the potential gains this play comes with. However, wine itself isn’t the most lucrative side of sinvesting, and it’s worth taking note.

Concha pays four dividends throughout each fiscal year — three interim payments and one final dividend. Unfortunately, recent history looks a bit shaky on the income front.

We noted Concha recently increased its payment nearly 31%, to 89 cents, from last year’s 68 cents. But the previous several years showed more of a roller coaster of payments — 54 cents in 2005, 34 cents in 2006 and 79 cents in 2007.

On top of a roller coaster payment, Concha’s dividend yield is too microscopic to combat today’s rough market. Using the most recent fiscal year’s worth of payments, we’re looking at a 2.2% dividend yield.

So instead of recommending you buy units of Concha y Toro today, I’m recommending that you jot its name down and hold on for the swing in sentiment that’s sure to come down the road for this stock. When investors realize just what’s going on in this company, it could make for an attractive investment. But not yet…

Sincerely,
Jim Nelson
Penny Sleuth

June 22, 2010

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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