{"id":35130,"date":"2013-01-08T12:24:42","date_gmt":"2013-01-08T17:24:42","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=35130"},"modified":"2013-01-08T12:24:43","modified_gmt":"2013-01-08T17:24:43","slug":"my-favorite-tobacco-stock-isintel","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/01\/08\/my-favorite-tobacco-stock-isintel\/","title":{"rendered":"My Favorite Tobacco Stock is\u2026Intel?"},"content":{"rendered":"

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

Yes, you read that correctly.\u00a0 My favorite \u201ctobacco stock\u201d is Intel Corp (Nasdaq:$<\/span>INTC<\/a>).<\/b><\/p>\n

Lest you think I\u2019ve lost my mind, I am aware that Intel does not sell or market cigarettes or other tobacco products. Intel is the world\u2019s premier designer and manufacturer of computer processors.<\/p>\n

But while Intel is not a tobacco company<\/i>, it most certainly is a tobacco stock<\/i>, or at least it shares many of their characteristics.<\/p>\n

This requires a little explaining.\u00a0 If you\u2019ve read some of my past posts, you are probably familiar with my reasons for liking tobacco stocks over the long haul, even if I recommend avoiding them at current prices (see \u201cThe Price of Sin<\/a>\u201d<\/strong> and \u201cTime to Stop Bogarting Cigarette Stocks<\/a>\u201d<\/strong>).\u00a0 Because of the social stigma associated with vice investments like tobacco, alcohol and firearms, many institutional investors shun them, either by choice or by socially-responsible investment mandate.\u00a0 This causes sin stocks to be priced as perpetual value stocks, with the low valuations and fat dividends that this entails.<\/p>\n

Well, I admit, in this particular respect Intel has nothing in common with tobacco stocks (even if it is priced like one at the moment). \u00a0It\u2019s hard to find a scale by which Intel would be considered socially irresponsible. But let\u2019s take a look at some of the other characteristics that make tobacco stocks\u2014and Intel\u2014interesting.<\/p>\n

Tobacco companies have gargantuan barriers to new competition\u2014what Warren Buffett might call an unassailable moat.\u00a0 \u00a0Given the legal and political risk and the size and scale needed to deal with both, it would be next to impossible to start a new tobacco company now.\u00a0 You would need infinitely deep pockets and decades\u2019 worth of political connections. As a result, Big Tobacco has become an entrenched oligopoly in which a handful of players\u2014such as Altria (NYSE: $<\/span>MO<\/a>), Reynolds American (NYSE:$<\/span>RAI<\/a>) <\/b>and Lorillard (NYSE:$<\/span>LO<\/a>)<\/b>\u2014completely dominate.<\/p>\n

But even if you could start a new tobacco company, why would you?\u00a0 It\u2019s not exactly a business with a bright future. \u00a0In the developed world, tobacco is a business in steady but terminal decline.<\/p>\n

This brings me back to Intel.\u00a0 I\u2019m actually in the minority among investors at the moment in that I see a bright future for Intel.\u00a0 No, they haven\u2019t figured out mobile yet, but they will.\u00a0 As mobile devices become more and more sophisticated, they will need the power than only Intel can provide.\u00a0 And there is also the server business, which accounts for roughly a quarter of Intel\u2019s revenues.\u00a0 Ironically, while Intel has yet to really break into mobile, its server business has benefitted handsomely as the mobile revolution has created greater demand for cloud services.<\/p>\n

Yet this is not how the market views Intel right now.\u00a0 No, Intel is a company resigned to gentle decline, as its core PC market inevitably shrinks.\u00a0 From the way Intel bears talk, PC users are disappearing from polite company faster than smokers, forced to type on their physical keyboards in alleys behind buildings or in doorways.<\/p>\n

For the sake of argument, let\u2019s assume they\u2019re right.\u00a0 Intel would still be a buy at current prices.<\/b><\/p>\n

As the Big Tobacco has proven for decades, companies in declining industries can make excellent investments under the right conditions.\u00a0 If you have a dominant market position (think back to Warren Buffett’s “moats”), a conservative balance sheet, and have ample cash flow for share repurchases and dividends, you can do quite well by your investors even in a shrinking market. It\u2019s worked for Big Tobacco investors, and it will work for Intel investors as well.<\/p>\n

At just 9 times earnings, Intel is priced significantly cheaper than any major tobacco stock, and its dividend is competitive at 4.3%.\u00a0 I might add that Intel\u2019s dividend has risen by over 40% in the past two years<\/strong><\/em> and that its dividend still only accounts for 37% of (depressed) earnings.<\/p>\n

Buy Intel and reinvest your dividends.\u00a0 If I am right, Intel will regain its place among America\u2019s most reputable growth stocks.\u00a0 But even if I\u2019m wrong, Intel is positioned to offer \u201ctobacco like\u201d returns for the foreseeable future.<\/p>\n

Note: The \u201cIntel is a tobacco stock\u201d<\/b> concept was conceived during a podcast interview<\/a> <\/strong>with InvestorPlace Editor Jeff Reeves in which we each discussed our picks in the 10 Best Stocks of 2013<\/a><\/strong> contest.\u00a0 Jeff\u2019s choice was Intel; mine was German luxury carmaker Daimler (OTC:DDAIF).<\/b><\/i><\/p>\n

Disclosures: Sizemore Capital is long INTC and DDAIF<\/p>\n

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

The post My Favorite Tobacco Stock is\u2026Intel?<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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