Tobacco Stocks Gain Amid Heat-Not-Burn Product Growth

Tobacco stocks have burnt a hole in investors' portfolios over the past year, dropping 0.65% on the back of declining cigarette volumes. By comparison, the broader stock market has logged a gain of nearly 20% over the same time.

To address shrinking demand from its traditional products, leading tobacco companies Philip Morris International Inc. (PM) and Altria Group, Inc. (MO) have invested heavily in developing "smoke-free" alternatives. Their latest-to-market IQOS product heats tobacco, rather than burning it, supposedly releasing fewer toxins but delivering a similar nicotine rush. Philip Morris has already launched IQOS in more than 40 markets around the world, while Altria launched the heat-not-burn device in Atlanta last fall, several months after the Food and Drug Administration (FDA) approved the product for sale in the United States.

The controversial industry has had a mostly disappointing start to 2020, although renewed buying interest in the group late last week may ignite further gains in upcoming trading sessions. As well as taking a closer look at Philip Morris and Altria below, we’ll also review tobacco leaf supplier Universal Corporation (UVV).

Philip Morris International Inc. (PM)

Philip Morris International manufactures IQOS smoke-free products, including heated tobacco and vapor products under the HEETS, HEETS Marlboro, and HEETS FROM MARLBORO brands. It also sells the Marlboro HeatSticks and Parliament HeatSticks brands. The $138.47 billion company told shareholders in 2018 that it aimed to receive about 40% of its revenue from "reduced-risk" products by 2025. Earlier this month, the cigarette maker reported a fourth quarter 41% year-over-year jump in sales of its heated tobacco products. Philip Morris stock pays an annual $4.68 dividend and has gained 5.35% year to date (YTD), outperforming the tobacco industry average by 4.74% over the same period as of Feb. 24, 2020.

Since bottoming out in the third quarter last year, the firm's stock has made higher lows and higher highs, placing it in a steady uptrend. More recently, price broke above a pennant pattern Friday, indicating upside continuation. Those who buy here should consider trailing a stop-loss order under each successively higher swing low to let profits run as far as possible. Start by placing an initial stop beneath the pennant pattern's low at $86.14.

Chart depicting the share price of Philip Morris International Inc. (PM)

Altria Group, Inc. (MO)

With a market capitalization of $85.26 billion, Altria Group manufactures smokeless products in the United States. Citigroup analyst Adam Spielman upgraded the company's stock to "buy" from "neutral" late last year, citing a historically low price-to-earnings multiple for the rating change. Currently, the shares trade at 10.44 times projected earnings, significantly below their five-year average multiple of 17 times. Despite ongoing challenges from its investment in e-cigarette maker Juul Labs, Inc., Altria's noncombustible business remains supported by the launch of IQOS as well as the commercialization of on! As of Feb. 24, 2020, Altria stock has slumped 8.05% on the year, although a smoking hot 7.44% annual dividend yield helps partially offset the price depreciation.

Declines accelerated in the stock after the tobacco giant posted lackluster fourth quarter results in late January. However, the price stabilized last week at the $45 level, finding a zone of support from the neckline of an inverse head and shoulders pattern. Also, the moving average convergence divergence (MACD) line crossed above its signal line Friday to generate a buy signal. Swing traders who go long should set a stop under this month's low at $44.86 and book profits on a test of the YTD high at $51.77.

Chart depicting the share price of Altria Group, Inc. (MO)

Universal Corporation (UVV)

Universal Corporation supplies leaf tobacco products globally. Rather than selling consumer products itself, the 134-year-old company procures leaf tobacco from farmers and markets it to tobacco manufacturing companies. In early February, the firm disclosed fiscal third quarter adjusted earnings of $1.08 per share on revenue of $505.5 million. CEO George Freeman said flue-cured oversupply conditions had created a selective market environment that affected volumes and margins. The tobacco supplier's shares have a market value of $1.25 billion and are trading down 9.59% so far this year as of Feb. 24, 2020. Investors also receive an enticing 6.08% dividend yield.

Universal shares have traded sideways over the past 12 months, with the most recent retracement to an area of support at $49.50 providing an opportunity to those who employ range-bound strategies. Traders who buy at current levels should set a profit target near the existing range's overhead resistance at $56 while managing risk with a stop situated under the Feb. 19 low at $49.09. 

Chart depicting the share price of Universal Corporation (UVV)
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