Why You Should Invest in Tobacco & Marijuana: Altria Group Inc (MO), Reynolds American, Inc. (RAI), Lorillard Inc. (LO)

Altria Group (MO)Investing in tobacco companies is like flipping a coin. On one side, you have high regulations, taxes, and a poor PR image. On the other side, you have predictable growth and generous capital allocation policies. At any given time, the market will react largely to just one side. Do you flip? In this article, I explain my thoughts on two top tobacco producers and explain why medical marijuana will help slant the odds of the coin toss in your favor.

What Others Are Saying About Altria Group Inc (NYSE:MO)

Altria Group Inc (NYSE:MO) is the leading cigarette company and owner of the famous Marlboro brand. In fact, Marlboro is the most popular cigarette brand in the world with a market share rank of either 1 or 2 in the regions it is operating in. On top of that, the producer has executed time and time again. In the fourth quarter, revenue came out to $6.24 billion and was ~45% better than expected.

Perhaps the biggest downside comes from regulatory scrutiny. There has been increasing pressure on cigarette products due to associated health effects. Cigarette companies have been threatened with regulations for more conspicuous warning labels on cigarette packets, taxes, anti-tobacco advertising, you name it. The European Union, through its Health Commission, is also implementing similar regulations. Due to government efforts to discourage the use of tobacco products, cigarette consumption has fallen in several countries. However, large companies such as Altria Group Inc (NYSE:MO) continue to generate good levels of cash flow. This resilience is being attributed to the diversification of its products.

Should Altria Market a Marijuana Brand? Yes!

At the same time that regulatory pressure is rising on tobacco, it is declining on marijuana. This market has already garnered significant interest at the Motley Fool and other popular investment sites. Several analysts have already covered Cannabis Science and Medical Marijuana, so I want to briefly highlight what tobacco producers can learn from a new entrant in the “Green Rush,” called “Nuvilex.” This is important in showing how Altria can very easily get upside to outweigh downside by just doing the same and simply entering the market.

Nuvilex is ultimately a biotech company. In a Phase II trial, its pancreatic cancer treatment did three big things: (1) it doubled the median survival time compared to the standard treatment; (2) it doubled the number of survivors past one year; and (3) it had no adverse immunological events. This is important, because one of the main headwinds medical marijuana stocks face is that investors see them as purveyors of pseudo-science.

However, with successful experience in biotechnology, Nuvilex removes this kind of thinking. Its recent decision to enter the marijuana industry by developing a cannabinoid that treats glioblastoma multiforme was more or less instantly greeted with double-digit returns. By virtue of its size and execution, Altria Group Inc (NYSE:MO) can also enter the marijuana industry and thereby similarly expand upside while maintaining a stable core business. In my view, few would look askance at diversification that takes the eyes off higher excise taxes, blunter product labeling, and countless lawsuits.

Already, Altria Group Inc (NYSE:MO) has shown the power of its brands; it should be noted that the company has been able to increase prices without scaring away customers. In the third quarter of 2012, the company had a 3.2% increase in earnings. Technical analysis has attributed much of this growth to higher prices on cigarettes. Imagine what the company could do if it were to launch a new marijuana brand? It would create a very strong first-mover advantage in a high-growth industry at no risk to its traditional income streams. Plus, according to an AskMen article and other peer-reviewed scientific literature, THC within marijuana has shown several health benefits and poses less risk to smokers than tobacco. Again, this is the kind of PR fix that Altria–long a target for higher excise taxes–needs to re-catalyze growth.