Big Tobacco lost a major battle in mid-May after a high court in London rebuffed an attempt by tobacco companies to prevent mandatory plain packaging in England. Because of the ruling, major brand cigarettes in England will soon be pretty much indistinguishable from each other besides standard features such as the brand name. The logos and brand colors are now a thing of the past. Investors worry that courts and governments in other countries (particularly in the EU) could follow England’s lead and mandate plain packaging too. Seeing as how the ruling has negatively affected tobacco stocks, let’s analyze how hedge funds are positioned among the major tobacco companies, such as Philip Morris International Inc. (NYSE:PM), Altria Group Inc (NYSE:MO), Reynolds American, Inc. (NYSE:RAI), Vector Group Ltd (NYSE:VGR), and British American Tobacco PLC (ADR) (NYSEMKT:BTI).
Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 700 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).
#5 British American Tobacco PLC (ADR) (NYSEMKT:BTI)
– Number of Hedge Fund Holders (as of March 31): 14
– Total Value of Hedge Fund Holdings (as of March 31): $614.36 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 0.60%
Of the 766 elite funds that Insider Monkey tracks in its database, 14 of them owned British American Tobacco PLC (ADR) (NYSEMKT:BTI) at the end of the first quarter, including Jim Simons’ Renaissance Technologies and Joel Greenblatt’s Gotham Asset Management. One reason the esteemed hedge fund managers own the stock is because British American pays a dividend of 3.78%, around twice the 10 year Treasury yield. The stock has also been a good performer of late, with shares up 11.15%. Despite the rally, the stock also trades for a decent forward P/E of only 16.5.
#4 Vector Group Ltd (NYSE:VGR)
– Number of Hedge Fund Holders (as of March 31): 15
– Total Value of Hedge Fund Holdings (as of March 31): $238.27 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 8.40%
15 top hedge funds owned Vector Group Ltd (NYSE:VGR) at the end of March, making Vector the fourth most widely held tobacco stock among the elite funds that Insider Monkey tracks. Vector reported solid first quarter earnings, beating both top and bottom line estimates with EPS of $0.16 on revenue of $380.8 million versus estimates of $0.15 per share and $360.9 million. Adjusted EBITDA was $69.6 million for the quarter, up from $51.3 million for the first quarter of 2015. The company’s real estate segment group reported revenues of $159.7 million, up from $132.7 million from three quarters ago. Because the company is more than just tobacco, Vector Group is a little bit more diversified than its peers and has a higher forward P/E of 26.22. The company also pays an attractive 7.63% dividend yield.