Another 7% drop in the shares of winemaker Vintage Wine Estates (VWE) since my Aug. 15 piece on the plight of recent wine stock initial public offerings (IPOs) was the impetus for a new position in Vintage Wine. However, I did not buy the stock. Rather, I made a much riskier move and purchased Vintage Wine warrants (VWEWW) , which expire in June 2026 and allow the holder to buy one share of Vintage Wine at an exercise price of $11.50.
This move provides a degree of leverage. For the same cash outlay I made for the warrants, I would have owned a much smaller stock position. At the average price I paid per 1,000 warrants (just under 89 cents each, or $890 per 1,000), I could have bought about 155 shares of VWE, which closed on Tuesday at $5.70. The potential downsides are significant; the warrants have no intrinsic value and the warrant strike price of $11.50 currently is under water.
What I do have is time. The warrants expire in just under four years, so my capital outlay is simply buying some time. In essence, I have a long-dated call option on a presumption that VWE has been overly punished in 2022 (it's down 53% year to date) and may see better times ahead.
Vintage Wine may help out to a small extent via its March repurchase authorization, which allows it to buy back up to $30 million in stock and warrants. However, that authorization is set to expire on Sept. 8, so it's a very small window. We do know the company repurchased $2.8 million of its stock in its most recently reported quarter that ended March 31, but we don't know of any activity since then.
It is more than likely that I won't be waiting around until warrant expiration and probably won't exercise. This is a shorter-term maneuver, an attempt to take advantage of what could be a 50-cent dollar.
Vintage Wine currently trades at 12x 2023 consensus earnings estimates. Revenue has been growing at a solid clip, up 68% year over year for the third quarter. Full-year revenue is expected to be $330 million, which would be up 50% year over year. Results are expected to be out at the end of October.
This trade is not for the faint of heart.