{"id":34137,"date":"2012-12-06T13:07:24","date_gmt":"2012-12-06T18:07:24","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/12\/tobacco-stocks-watch-your-ash\/"},"modified":"2012-12-06T13:07:24","modified_gmt":"2012-12-06T18:07:24","slug":"tobacco-stocks-watch-your-ash","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/12\/06\/tobacco-stocks-watch-your-ash\/","title":{"rendered":"Tobacco Stocks: Watch Your Ash!"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a><\/p>\n

Victory for Big Tobacco investors<\/p>\n<\/div>\n

I like the occasional cigar after a hard week at the office, though I can hardly call myself a connoisseur.\u00a0 And I\u2019ve always been impressed by experienced smokers who can smoke their cigars down to a perfect ash without it crumbling off and landing in their laps.\u00a0 I\u2019ve seen ash still perfectly intact at 2-3 inches.<\/p>\n

That\u2019s impressive.\u00a0 Though you\u2019d never think for a moment that it was sustainable.\u00a0 Eventually, the ash will break and fall to the floor.<\/p>\n

This is how I feel when I look at tobacco stocks today.\u00a0 And I say this as a long-time bull in sin stocks<\/a> in general and tobacco stocks in particular.\u00a0 Some of the best investments I have ever made have been in tobacco stocks.\u00a0 But at current prices, I prefer to sit in the no-smoking section.<\/p>\n

Over the past month, dividend-focused sectors such as utilities, MLPs and REITs have all trended down as investors worry about higher dividend taxes coming in 2013.\u00a0 Yet Big Tobacco continues to drift higher like a smoke ring (another party trick I was never able to do).<\/p>\n\n\n\n\n\n\n\n
\n

Company<\/p>\n<\/td>\n

\n

Ticker<\/p>\n<\/td>\n

\n

1-Month Performance<\/p>\n<\/td>\n<\/tr>\n

Philip Morris International<\/td>\n\n

$<\/span>PM<\/a><\/p>\n<\/td>\n

\n

3.0%<\/p>\n<\/td>\n<\/tr>\n

Lorillard<\/td>\n\n

$<\/span>LO<\/a><\/p>\n<\/td>\n

\n

4.7%<\/p>\n<\/td>\n<\/tr>\n

Altria<\/td>\n\n

$<\/span>MO<\/a><\/p>\n<\/td>\n

\n

6.0%<\/p>\n<\/td>\n<\/tr>\n

Reynolds American<\/td>\n\n

$<\/span>RAI<\/a><\/p>\n<\/td>\n

\n

7.2%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Something is amiss here.\u00a0 Tobacco is a zero-growth business.\u00a0 Your only realistic source of return is from the dividend.\u00a0 I would go so far as to say that tobacco stocks are the most-dividend-focused stocks of any sector or subsector.<\/p>\n

I understand the appeal of tobacco stocks.\u00a0 They are a defensive consumer staple and they represent stability in a volatile market.\u00a0 And in a world where bonds yield less than 2% and savings accounts yield nothing, a 3-5% dividend can seem pretty attractive.<\/p>\n

Yet the same arguments can be (and are) made of REITs and MLPs, and these also have far better potential for capital gains.\u00a0 If investors are concerned about the fiscal cliff and dividend taxes, then they should be selling tobacco stocks along with their utilities and other income-oriented stocks.<\/p>\n

Tobacco stocks are also shockingly expensive. Altria (NYSE:$<\/span>MO<\/a>)<\/strong>, the maker of Marlboro among other brands, currently trades at 17 times earnings\u2014significantly higher than the broader S&P 500.\u00a0 Philip Morris International (NYSE:$<\/span>PM<\/a>)<\/strong> has a significantly lower dividend yield than chip juggernaut Intel (Nasdaq: $<\/span>INTC<\/a>)<\/strong>.<\/p>\n

Remember, we\u2019re talking about tobacco<\/em> here.\u00a0 The substance that requires warning labels and gruesome graphics on the side of package\u2026and a substance that fewer people use every passing year.\u00a0 Tobacco stocks should <\/em>trade at a discount to the broader market, and they generally do.\u00a0 In fact, this chronic underpricing has been a major driver of returns over the past several decades. \u00a0But without the underpricing, I cannot consider tobacco stocks worthy of purchase.<\/p>\n

Investors hunting for yield would be better off buying a basket of quality MLPs and REITs or even a dividend-focused ETF like the Vanguard Dividend Appreciation ETF (NYSE: $<\/span>VIG<\/a>)<\/strong>.<\/p>\n

Are tobacco stocks about to go up in smoke?<\/p>\n

Maybe, maybe not.\u00a0 As long as yields stay low, tobacco stock prices could stay high.\u00a0 Still, the divergence from other dividend-focused sectors is a major red flag for me.<\/p>\n

My recommendation: If you do not already own tobacco stocks, stay away.\u00a0 If you do own highly-appreciated tobacco stocks, consider selling.\u00a0 Or at least tighten your stop losses.\u00a0 Sizemore Capital has sold most of its tobacco positions, but we have two long-term positions in Altria and Philip Morris International that we have held for multiple years.\u00a0 But even on these positions, we are tightening our stop losses and preparing to sell at the first sign of weakness.<\/p>\n

SUBSCRIBE <\/a><\/strong>to Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

The post Tobacco Stocks: Watch Your Ash!<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

\n

Related posts:<\/p>\n