With many stocks as well as indices hitting all-time highs
in recent weeks and eclipsing the losses suffered during Q1’s coronavirus crash, many investors are hesitant about buying in at the highs, particularly as things start to look a little frothy
. So instead, they’re on the lookout for a ‘sleeper agent stock’. They’re looking for one that has flown under the radar, gone about its business relatively quietly compared to others, and is due to a catchup rally. $75 billion tobacco giant Altria Group (NYSE: MO)
looks set to fit the bill.
Like pretty much every other equity name out there at the time, Altria’s stock was dumped at the start of February and fell 40% in just two months. The fact that the tobacco industry is way more immune to a recession than most consumer discretionary or even tech stocks didn’t matter, investors wanted out of anything that had a hint of risk. The pandemic came at a bad time for Altria as their shares had just completed a 30% rally that started last September and looked set to threaten the downtrend that they’d been under since 2017.
They’re one of the biggest tobacco companies in the world and count the likes of Marlboro and Benson and Hedges cigarettes as well as the leading e-cigarette name Juul in their portfolio. Now with shares only trading halfway between their pre-COVID high and post-COVID low, the opportunistic investor would do well to take a closer look.
One of the top reasons to start with is the company’s dividend yield which is currently at a very generous 8.20%. Understandably, it’s been a firm favorite of dividend-focused investors for many years. With a fairly recession-proof business model behind it, it makes for an attractive option for investors looking to hedge their equity portfolio over the coming months. Only this week, we’ve seen the major banks bolstering their bad loan credit reserves as they brace for a tightening cycle.
While many will see the ongoing decline in cigarette smoking equating to a decline in tobacco companies, this doesn’t hold up under scrutiny. Altria’s most recent earnings report at the end of April showed revenue increasing 15% year on year. January’s report showed revenue flat year on year while October’s had it up 2%. If anything, the company has gained momentum from the coronavirus pandemic. Morgan Stanley weren’t afraid to upgrade the stock to Overweight back in March, following the folks over at Piper Sandler who had upgraded the stock in January.
These boosts came only weeks after Altria confirmed a $4 billion hit in the form of an impairment charge from their investment in Juul, which was mired in litigation cases for much of last year. The analysts argued that the fallout from Juul’s legal cases in 2019 had to a large extent been accounted for and any downside has been well baked into share prices.
Promising Days Ahead
As recently as May, Argos analyst David Coleman maintained his Buy rating on the stock and told clients "we believe that consumers will continue to view vaping products as a more acceptable nicotine delivery system than traditional cigarettes or chewing tobacco and that the use of these products will grow despite legislative restrictions. We also note that Altria still generates most of its revenue from smokeable products, including top-selling brands such as Marlboro, and that smokeless products accounted for just 12% ($574 million) of net revenue in 4Q19. The company also benefits from a strong balance sheet and pays a solid dividend with a yield of about 9.0%."
But despite all this positive momentum and commentary, shares are still languishing 25% from pre-COVID levels. The flip side of that though is the opportunity for a catch-up rally, especially if the next earnings report yields another double-digit percentage jump in revenue. The risk-reward ratio is pretty favorable at these levels, with an 8% dividend yield going a long way to helping investors wait patiently for Wall Street to take notice.
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Did you know the S&P 500 as we know it today does not look anything close to what it looked like 30 years ago? In 1987, IBM, Exxon, GE, Shell, AT&T, Merck, Du Pont, Philip Morris, Ford and GM had the largest market caps on the S&P 500. ExxonMobil is the only company on that list to remain in the top 10 in 2017. Even just 15 years ago, companies like Radio Shack, AOL, Yahoo and Blockbuster were an important part of the S&P 500. Now, these companies no longer exist as public companies.
As the years go by, some companies lose their luster and others rise to the top of the markets. We've already seen this in the last few decades with tech companies surpassing industrial and energy companies that once dominated the S&P 500. It's hard to know what the next mega trend will be that will knock Apple, Google and Amazon off the top rankings of the S&P 500, but we do know that companies won't stay on the S&P 500 forever.
We've identified 20 companies that are past their prime. They aren't at risk of a near-term delisting from the S&P 500, but they are showing negative earnings growth for the next several years. If you own any of these stocks, consider selling them now before they become the next Yahoo, Radio Shack, Blockbuster, AOL and are sold off for a fraction of their former value.
View the "20 "Past Their Prime" Stocks to Dump From Your Portfolio".