Five Tobacco Stocks to Buy Right Now

Though cigarette consumption is on a decline within the developed world for the past many years, the profits of the tobacco industry has grown significantly all this time. This rise in profits has translated well for tobacco stocks with a number of them delivering outsized returns to investors in the past decade. The relative outperformance of tobacco stocks can be gauged from the returns of the Dow Jones U.S. Tobacco Index, which has appreciated by 183.27% in the last 10 years, compared to the meager gain of 63.84% that the S&P 500 has generated during the same time. Since the tobacco industry has performed well despite hurdles like advertising and marketing bans imposed on it in several countries, a lot of analysts and investors continue to remain bullish on its future prospects. Taking that into consideration, in this article, we will take a look at the top-five most popular tobacco stocks at the end of second quarter among hedge funds covered by us and will discuss how these stocks have performed so far in 2016.

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At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

#5 Vector Group Ltd (NYSE:VGR)

– Hedge Funds with Long Positions (as of June 30): 15

– Value of Hedge Funds’ Holdings (as of June 30): $187.13 Million

First up on our list is Vector Group Ltd (NYSE:VGR), which saw its ownership among hedge funds covered by us remain constant during the second quarter, but the aggregate value of their holdings in it decline by $51.1 million during the same time. Shares of the Florida-based company have been trading in the $20-$25 range for more than two years now and have lost almost 5% of their value so far in 2016. Though Vector Group Ltd (NYSE:VGR) is known for its tobacco business, its real-estate arm has been growing at a rapid pace in the last few years and now constitutes a major part of the company’s top-line. The stock currently pays a quarterly dividend of $0.40 per share, which based on its last trading price translates into a forward yield of over 7%. For its most recent quarter, the company reported EPS of $0.20 on revenue of $438.27 million versus analysts’ estimate of EPS of $0.22 on revenue of $430.7 million.

#4 British American Tobacco PLC (ADR) (NYSEMKT:BTI)

– Hedge Funds with Long Positions (as of June 30): 15

– Value of Hedge Funds’ Holdings (as of June 30): $641.21 Million

The number of hedge funds covered by us long British American Tobacco PLC (ADR) (NYSEMKT:BTI) inched up by one and the aggregate value of their holdings rose by $26.77 million during the second quarter. Funds that lowered their stakes in the company during that period included Andre F. Perold’s HighVista Strategies and billionaire Jim Simons‘ Renaissance Technologies. British American Tobacco PLC (ADR) (NYSEMKT:BTI)’s stock recently has reached its lifetime high of $131.34. Though the stock has corrected quite a bit since then, it is still up by 10.21% year-to-date. In June, analysts at Goldman Sachs upgraded the stock to ‘Conviction Buy’ from ‘Sell’ citing increased confidence in the company’s growth outlook amid a weakness in the pound and higher growth from e-cigarettes. In the last few months, money management firms in Europe have been pressured by activists and anti-tobacco organizations to stop investing in tobacco companies. However, the stocks of most European tobacco companies haven’t been significantly impacted by this and except for the French insurance giant Axa no other notable investors have sold off their positions in tobacco companies on ‘moral grounds’.

#3 Reynolds American, Inc. (NYSE:RAI)

– Hedge Funds with Long Positions (as of June 30): 40

– Value of Hedge Funds’ Holdings (as of June 30): $1.47 Billion

Moving on, Reynolds American, Inc. (NYSE:RAI) also saw its ownership among investors covered by us inch up by one during the second quarter. However, the aggregate value of their holdings in the company shrunk by $224.4 million during that period. Shares of the make of ‘Newport’ and ‘Camel’ cigarettes have appreciated by 158% in the last five years though they are currently trading flat for 2016. The company recently hiked its dividend to $0.46 per share from $0.42 per share, which translates into an annual dividend yield of almost 4%. Most analysts who track Reynolds American, Inc. (NYSE:RAI) have an optimistic view on it citing the relatively lower valuation compared to its peers and its strong fundamentals. Though a lot of those analysts acknowledge that the sales volume of the company isn’t going to rise due to the decreasing demand of tobacco products, they think that the company can still increase its margins through cost reduction measures.

#2 Altria Group Inc (NYSE:MO)

– Hedge Funds with Long Positions (as of June 30): 46

– Value of Hedge Funds’ Holdings (as of June 30): $1.90 Billion

Amid a 10% rise in its stock during the second quarter, the number of hedge funds covered by us long Altria Group Inc (NYSE:MO) increased by five and the aggregate value of their holdings jumped by $143 million. One of the hedge funds that boosted its stake in the company significantly during that period was billionaire Ken Griffin‘s Citadel Investment Group, which increased its holding by 281% to 900,237 shares. Although Altria Group Inc (NYSE:MO)’s stock has given up a large chunk of the gains registered during the second quarter since the beginning of July, it is still trading up by 8% year-to-date. The company has been hiking its quarterly dividend every year for the past 47 years and recently raised it by 8% to $0.61 per share, which gives the stock an annual dividend yield of 3.84% based on the stock’s last trading price. Altria Group currently accounts for over half of the retail sales of cigarettes in the U.S. However, many analysts feel that amid a consistent decline in the consumption of tobacco products, the company must increase its focus on its alcohol business in order to make up for the loss of revenue from cigarette sales in the future.

#1 Philip Morris International Inc. (NYSE:PM)

– Hedge Funds with Long Positions (as of June 30): 47

– Value of Hedge Funds’ Holdings (as of June 30): $4.62 Billion

Philip Morris International Inc. (NYSE:PM) continued to remain the favorite tobacco stocks at the end of June among hedge funds covered by us even though the number of funds long the stock declined by one during the second quarter. Nevertheless, the aggregate value of their positions rose by $731 million during the quarter. Shares of the tobacco giant performed extremely well during the first-half of this year and managed to break above the $100 mark for the first time in their history. Owing largely to the gains it made during the first six months, the stock is currently trading up by nearly 10% year-to-date. The company is expected to report its third-quarter results by the end of the next month and the current consensus estimate among analysts includes EPS of $1.22 on revenue of $7.06 billion. For the same quarter of the previous financial year, Philip Morris International Inc. (NYSE:PM) had reported EPS of $1.24 on revenue of $6.93 billion. On July 15, analysts at Goldman Sachs Group reiterated their ‘Neutral’ rating on the stock, but increased the price target to $105 from $99.

Disclosure: None