{"id":28065,"date":"2012-03-08T11:31:06","date_gmt":"2012-03-08T16:31:06","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/08\/tobacco-stocks-still-smokin\/"},"modified":"2012-03-08T11:31:06","modified_gmt":"2012-03-08T16:31:06","slug":"tobacco-stocks-still-smokin","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/08\/tobacco-stocks-still-smokin\/","title":{"rendered":"Tobacco Stocks Still Smokin\u2019"},"content":{"rendered":"

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

After getting off to a slow start in January (see \u201cSin Stocks Trailing their More Virtuous Peers<\/a>\u201d), tobacco stocks are making up lost ground in a hurry (see Figure 1).<\/p>\n

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

Of the major American tobacco stocks, all but Reynolds American (NYSE: $<\/span>RAI<\/a>) <\/strong>are beating the S&P 500 after dividends are taken into account.\u00a0 And even Reynolds beat the S&P 500 for the month of February.<\/p>\n

Big Tobacco has been one of the few bright spots in recent years.\u00a0 With investors legitimately fearful about the state of the economy and the on-again \/ off-again volatility that has been roiling the stock market, stable, defensive sectors have been a popular refuge.\u00a0 And given that bonds pay so little these days as to be worthless\u2014the 10-year Treasury note currently yields less than 2 percent\u2014the high and growing dividends have made the sector attractive to income investors.<\/p>\n

But as the risk of a Eurozone meltdown continue to fade (see \u201cAll Quiet on the Western Front<\/a>\u201d) and investor risk tolerance starting to thaw, are tobacco stocks still an attractive investment?\u00a0 Or should investors rotate into more aggressive, cyclical sectors?<\/p>\n

I know you want a simple \u201cyes\/no\u201d answer here, but the truth is a little more complicated.\u00a0 The attractiveness of Big Tobacco depends on your time horizon.<\/p>\n

\"\"<\/a>I love Big Tobacco and \u201cSin Stocks<\/a>\u201d in general, and I have made several Sin Stocks\u2014among them Altria (NYSE: $<\/span>MO<\/a>, Philip Morris International (NYSE: $<\/span>PM<\/a>)<\/strong> and Diageo (NYSE: $<\/span>DEO<\/a>)<\/strong> core recommendations of the Sizemore Investment Letter.<\/em><\/a><\/p>\n

Over time, Big Tobacco stocks have massively outperformed virtually all other investments due to the stability of their businesses and the large dividends they typically pay.\u00a0 As Jeremy Siegel explained in The Future for Investors<\/em>, the outperformance of tobacco stocks over time is due almost exclusively to the compounding effects of reinvested dividends.<\/p>\n

But herein lies the key.\u00a0 Tobacco stocks are great long-term<\/em> investments.\u00a0 A dividend reinvestment strategy takes years to fully realize, the last few years of stellar short-term gains notwithstanding.<\/p>\n

But in any given short-term period (say, six months to five years), tobacco stocks are by no means a lock to outperform.\u00a0 They, like all other stock sectors, fall in and out of favor with changing investor sentiments.<\/p>\n

With all of that said, I don\u2019t<\/em> believe that tobacco stocks will be big outperformers in 2012.\u00a0 I see 2012 favoring two broad sectors:<\/p>\n

    \n
  1. European stocks that took a beating last year; Europe is full of solid blue chips ripe for the picking, trading at prices we may never see again.<\/li>\n
  2. More speculative sectors, such as emerging markets, technology, and lower-quality \u201cjunky\u201d stocks.<\/li>\n<\/ol>\n

    As investors rediscover their risk appetites, I see them chasing the sectors that promise higher immediate returns.<\/p>\n

    Does this mean I\u2019m selling my Big Tobacco stocks?\u00a0 Not a chance.<\/em><\/p>\n

    My standing recommendation is that investors build a core portfolio of rock-solid companies that pay high and rising dividends, of which tobacco stocks are a natural fit.\u00a0 This should be the bedrock of your portfolio for the next 5-7 years, or at least for as long as other income alternatives\u2014such as bonds\u2014are unattractive.\u00a0 I will not be recommending that my readers sell their tobacco any time soon.<\/p>\n

    But once the core portfolio is in place, investors can allocate new monies to more speculative areas of the market, such as Europe and emerging markets.\u00a0 As a rule of thumb, I would put 50-70% of your assets in the core portfolio and use the remainder for shorter-term tactical trades.<\/p>\n

    In the meantime, sit back and continue to collect those Big Tobacco dividends.<\/p>\n

    Disclosures: PM, MO, and DEO are recommendations of the Sizemore Investment Letter<\/em><\/a> and are held by Sizemore Capital<\/a> clients.<\/p>\n","protected":false},"excerpt":{"rendered":"

    By The Sizemore Letter After getting off to a slow start in January (see \u201cSin Stocks Trailing their More Virtuous Peers\u201d), tobacco stocks are making up lost ground in a hurry (see Figure 1). Of the major American tobacco stocks, all but Reynolds American (NYSE: $RAI) are beating the S&P 500 after dividends are taken … <\/p>\n

    Continue reading “Tobacco Stocks Still Smokin\u2019”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-28065","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/28065","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=28065"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/28065\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=28065"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=28065"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=28065"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}