Tobacco stocks have offered perfect investment vehicles for patient shareholders in the past decade, paying sizable dividends while posting a near endless series of new highs. Of course, taking exposure in this controversial industry isn't for everyone, especially if loved ones have paid the price for nicotine addiction. However, buying shares of a company isn't the same thing is supporting their business practices, and it's our job to seek out superior returns wherever we can find them.
Strong Asian growth now drives industry profits, along with a resurgence in U.S. consumption triggered by modern vaporizer technology. In addition, the current administration has plans to strip away regulations across a broad swath of industries, making it unlikely that producers will get singled out for criticism in coming years. Given these tailwinds, tobacco stocks are likely to perform well into the next decade. (For more, check out: Back From the Dead: Why Tobacco Stocks Are Soaring.)
Philip Morris International Inc. (PM) carries the highest sector capitalization for tobacco producers trading on the U.S. exchanges at $184 billion. It spun off from parent Altria Group, Inc. (MO) at $50 in March 2008 and entered an immediate downtrend that posted an all-time low at $32.04 in March 2009. The subsequent recovery wave reached the upper $90s in 2013, giving way to a multi-year correction that found support in the mid-$70s.
The stock rallied above the prior high in 2016 and stalled out, building a base on new support and then spiraling lower in November. That marked the washout low, ahead of a strong buying impulse that reinstated the breakout in January 2017, followed by a powerful trend advance to an all-time high at $122.90 on June 6. Philip Morris stock has been pulling back in a bull flag pattern since that time, while daily stochastics have dropped into the oversold zone. (See also: Philip Morris, the Best Is Yet to Come: Wells Fargo.)
Both monthly and weekly indicators have held buy cycles through this period, signaling a bullish divergence and potential pullback buying opportunity ahead of continued upside. Even so, a more advantageous trade entry might come if aggressive sellers break short-term support and knock the stock down to the top of the first quarter range and 50-day EMA at $115.
Altria Group expanded into spirits and finance leasing services following the Philip Morris spin-off, but tobacco remains its biggest profit component. It fell just 7 points during the 2008 economic collapse, returning to the prior high in 2010, ahead of a 2011 breakout that reached $70.14 in July 2016. A pullback into the fourth quarter settled near $60, ahead of a January 2017 rally into March's all-time high at $76.54. (See also: Altria Optimistic on FDA's Filing of Heated Products.)
Altria Group shares sold off into May, testing new support near $70 and turning higher into June, settling into a narrow platform that traded within 60 cents of resistance this week. On-balance volume (OBV) has already risen to a new high, highlighting strong institutional sponsorship that should support a fresh rally leg into the low $80s, where a two-year rising-highs trendline could trigger another reversal.
Reynolds American Inc (RAI) rallied above the 2008 high in 2011 and entered a rising channel that accelerated into a steeper channel in 2014, highlighting impressive relative strength. The uptrend stalled near $50 at the end of 2015, giving way to a shallow correction that ended with a high-volume October gap to a new high in the mid-$50s. It took three months to clear the high posted in that session, yielding a long series of new highs into last week. (For more, see: Reynolds Announces Leadership Roles Post Acquisition by BAT.)
The stock sold off with the broad market, dropping into the first test at the 50-day EMA since January, and it is still testing that level. Weekly stochastics fell into an unconfirmed sell cycle in reaction to the decline, raising odds for an intermediate correction lasting a minimum of eight to 12 weeks. Given this scenario, a pullback into deep support at $50 could offer a buying opportunity.
The Bottom Line
Tobacco manufacturers and distributors are leading the broad market, resistant to broad headwinds facing other high-yielding instruments. This resilience could last into the new decade, given humankind's addictive interest in the controversial crop. (For additional reading, see: Behind Tobacco Stocks' Recent Strength.)
<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>