Five Best Tobacco Stocks to Buy Amid Industry Growth

With the tobacco industry registering gains north of 20%, investors seem to be fond of the industry and have high expectations about more growth in the near term. In a Bloomberg interview last June, Susan Cameron, CEO of Reynolds American, said that the industry registers higher profits and sees a decline in smoker litigation on the back of regulations that make it harder to sue cigarette companies. In December, Moody’s issued a report suggesting an operating profit growth for US and European tobacco companies in 2016. The rating agency added that due to high pricing flexibility, the profitability of tobacco products in the US remains at the “higher end of the consumer products spectrum”.

With this in mind, we decided to take a closer look at the top five tobacco stocks that the investors from our database are fond of. We pay attention to the hedge fund sentiment because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Through extensive testing, we determined that the best approach is to follow hedge funds into the top small-caps that they are collectively bullish on, which can outperform the market by 95 basis points per month on average (see more details here).

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

Investors with Long Positions (as of September 30): 15

Aggregate Value of Investors’ Holdings (as of September 30): $398.58 Million

During the third trimester the number of hedge funds backing British American Tobacco PLC (ADR) (NYSEMKT:BTI) inched up by one while the aggregate value of these holdings appreciated by 20%. Nevertheless, these funds held around 0.40% of the company’s outstanding stock at the end of September. Tom Russo‘s Gardner Russo & Gardner is the largest shareholder of British American Tobacco PLC (ADR) (NYSEMKT:BTI) within our database as it holds some 4.97 million shares of the company. Analysts seem to be mixed on the stock. Earlier this month, Citigroup reiterated its ‘Buy’ rating on the stock. Previously, in October and November, JPMorgan and Goldman Sachs reaffirmed their ‘Buy’ and ‘Neutral’ ratings.

#4 Vector Group Ltd (NYSE:VGR)

Investors with Long Positions (as of September 30): 17

Aggregate Value of Investors’ Holdings (as of September 30): $233.59 Million

Vector Group’s stock ended 2015 with gains of over 16%, but, it has not helped the stock win the confidence of smart money investors. Moreover, between July and September, the number of funds with long positions in the company inched down by two.

In its financial results for the third quarter, Vector Group Ltd (NYSE:VGR) reported EPS of $0.11, which was $0.07 lower than the estimates, however, the revenue of $449.93 million managed to beat the expectations by $36.93 million. For the last quarter of 2015 analysts estimate EPS of $0.18 on revenue of $401 million. For the current year, the Street expects Vector Group to post earnings of $0.80 on revenue of $1.80 billion.

Among the funds we track, Jim Simons‘ Renaissance Technologies owns about 5.79 million shares of Vector Group Ltd (NYSE:VGR), according to its last 13F filing.

 

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

Investors with Long Positions (as of September 30): 33

Aggregate Value of Investors’ Holdings (as of September 30): $1.95 Billion

The total number of investors backing Reynolds fell by eight during the July-September period, but the aggregate value of their holdings surged by almost 54%, amid a 17% growth registered by the stock during the same period.

During 2015, Reynolds’ stock surged by more than 43%, and with a dividend yield of 2.98% and a forward price-to-earnings multiple of 18.5, the stock still looks attractive. In June, 2015, Reynolds American, Inc. (NYSE:RAI) finalized its $27.4 billion acquisition of Lorillard, which added the famous Newport brand to its already impressive portfolio. Recently, the company signed a vapor technology sharing agreement with British American Tobacco calling for collaboration on the development of the technology through 2022.

Neil Woodford‘s Woodford Investment Management heads our list of Reynolds American, Inc. (NYSE:RAI)’s stockholders as it owns some 14.41 million shares of the company.

 

#2 Altria Group Inc (NYSE:MO)

Investors with Long Positions (as of September 30): 41

Aggregate Value of Investors’ Holdings (as of September 30): $1.63 Billion

The total number of hedge funds having investments in Altria Group Inc (NYSE:MO) slid by two during the third quarter. However, the aggregate value of these holdings appreciated by more than 30%, while the stock gained about 10.4% during this period. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital raised its stake in Altria Group Inc (NYSE:MO) by 114% in the July-September period to 6.48 million shares.

The company’s stock closed 2015 with an appreciation of around 18% and currently sports a dividend yield of around 3.79%. The shares gained ground on the back of several events, including SABMiller’s acquisition by Anheuser Busch Inbev SA (ADR) (NYSE:BUD) in a $107 billion deal, with Altria holding around 27% of SABMiller.

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

Investors with Long Positions (as of September 30): 42

Aggregate Value of Investors’ Holdings (as of September 30): $3.13 Billion

Philip Morris International Inc. (NYSE:PM)’s stock gained around 8% during 2015 and, while the number of hedge funds with exposure to Philip Morris increased by one during the third quarter, the aggregate value of their holdings remained almost unchanged. Last year, the company lost a protracted and costly legal battle against Australian laws requiring branding on cigarette packaging to be replaced by graphic health warnings. Philip Morris has also been focusing on the development of its e-cigarette technology, which have been gaining considerable traction. According to Citigroup, e-cigarettes could have a compound annual growth rate of 50% for the next five years and revenues for the industry this year are expected to touch $3.2 billion, a sharp rise from $20 million in 2008. Andy Brown‘s Cedar Rock Capital holds about 12.45 million shares of Philip Morris International Inc. (NYSE:PM).

Disclosure: None