Tobacco stocks have been hot this month, with Altria rallying more than 10% and Philip Morris adding 7%. This comes as the S&P 500 has advanced just 1%.
But Bill Baruch, president of Blue Line Capital, says one stock’s rally could be about to hit a wall.
“Taking a look at Philip Morris, it’s had a decent year. I mean, its nearly 20% gains are more a product of the broader market,” Baruch said on CNBC’s “Trading Nation” on Friday. “It’s really the recent earnings, that’s it in a nutshell —good numbers but not-so-great guidance, so if this thing rallies there’s a lot of overhead resistance, $88 to $90. So, if you are in it, and it does get up there, take your profits.”
Philip Morris would need to add another 8% to hit $88. It last traded at that level in July.
Its main competitor, Altria, looks to have more promise than Philip Morris, Baruch says.
“There is some value down here, and I’ll tell you why. You’ve got a lot of support at $40,” he explained. “A lot of the negativity is already priced in — the Juul bans, you’ve seen a little bit of a bump up when the merger talks [with Philip Morris] dissipated. And they have earnings coming down the pipeline two weeks from now.”
Altria will report earnings on Oct. 31. Analysts surveyed by FactSet anticipate 6% earnings growth.
“Looking at this $40 support, we could see this thing stretch up into the end of the month and ahead of those earnings. So there’s a tradable opportunity here,” said Baruch.
Steve Chiavarone, portfolio manager at Federated Investors, agrees that there is value at least in some of the tobacco stocks.
“Investors don’t go to these companies because they love their products. They go to these companies because they love the fact that they’ve got stable pricing, they’ve got good earnings growth, and they’re attractive in terms of valuation with good yields, and none of that with all the headline news has really changed,” Chiavarone said during the same segment.
Altria trades at 10 times forward earnings, and Philip Morris at 15 times, while the S&P 500 trades with a 17 times multiple.
“The headline issues are the headline issues, this sector is absolutely no stranger to that, but the underlying fundamentals, from a pure stock perspective, actually look pretty attractive,” said Chiavarone.