Tobacco stocks have offered excellent returns and outsized dividends to investors willing to overlook the industry's lethal business model, narrowly focused on the rapid growth of an Asian customer base and high-tech vaping technology that introduced a new generation to the wonders of nicotine addiction. The sector is now under attack from all sides due to unexplained illnesses being attributed to chemicals that ease the flow of vape products into customers' lungs.
However, it isn't clear if legal vaping devices that also inject THC (the active ingredient in marijuana) and aromatics are to blame because illegal dealers are surreptitiously reloading used cartridges with home-grown blends that can include a laundry list of dangerous chemicals. And compounding the issue, many folks arriving in emergency rooms may be telling lies because they live in states without legal marijuana and don't want to get busted.
Although exact causes for the vaping crisis remain unclear, India just outlawed e-cigarettes, encouraging other countries to follow suit. This escalation in government enforcement has had an immediate impact on the group's biggest players, who are already trading near 2018 lows. Unfortunately for remaining bulls, the shareholder exodus is likely to continue unless the sector is fully exonerated for the illnesses.
Phillip Morris International Inc. (PM), the world's largest tobacco manufacturer, came public in its current incarnation at $50 in May 2008 and traded in a narrow range into a September breakdown that accelerated to an all-time low at $32.04 after the October crash. It completed a round trip into the 2008 high at $56 in 2010 and broke out, entering a strong trend advance that topped out in the upper $90s in 2013. A 2015 rally above resistance failed, while a March 2017 breakout posted healthy gains into June's all-time high at $123.55.
The subsequent decline failed the breakout and 50-month exponential moving average (EMA) support in April 2018, with China tensions affecting shareholder sentiment, and bottomed out in the mid-$70s in July. A December breakdown posted a seven-year low in the mid-$60s, while the 2019 recovery wave failed to mount resistance at the long-term moving average, yielding to a steep August slide that reached within seven points of the 2018 low about three weeks ago.
Selling pressure has resumed this month, while mixed price action hovers just above last month's low near $70, setting the stage for an intermediate breakdown that targets the mid-$60s. Accumulation-distribution readings have stabilized since June 2018 but still show no signs of fresh buying pressure, raising the odds that gravity will do its dirty work and drop the stock to multi-year lows.
Altria Group, Inc. (MO) sells tobacco and wine, offering some diversification to battered investors. However, the stock has performed worse than Phillip Morris this year and is now trading at a five-year low. Looking back, a breakout above seven-year resistance gathered strength in 2005, generating a strong uptrend that topped out in the mid-$20s in early 2008. Altria stock fell to a three-year low during the economic collapse and turned higher into the new decade, returning to the 2008 high in 2010.
A breakout booked historic gains into 2017, more than tripling in price before posting an all-time high at $77.79 and turning sharply lower in a channeled decline that has carved a long series of lower highs and lower lows into 2019. The stock just broke the December 2018 low at $42.40, but accumulation-distribution readings have held above that level, predicting a bounce that generates double bottom calls. However, the stock's laggard status compared to other tobacco plays raises the odds that the next recovery wave will fail.
The Bottom Line
Tobacco stocks are probing new lows after India banned e-cigarettes in reaction to the ongoing vaping crisis.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.