At Current Prices, Tobacco Stocks Are No-Go
Charles Sizemore | Feb 10, 2013 01:11AM ET
Back in December, I recommended that readers “Intel was my favorite “tobacco stock, ” arguing that Intel had quite a bit in common with the likes of an Altria and its peers:
As the Big Tobacco has proven for decades, companies in declining industries can make excellent investments under the right conditions. If you have a dominant market position (think back to Warren Buffett’s “moats”), a conservative balance sheet, and have ample cash flow for share repurchases and dividends, you can do quite well by your investors even in a shrinking market. It’s worked for Big Tobacco investors, and it will work for Intel investors as well.
The same could be said for Microsoft and Cisco. Tech is the new tobacco.
To be fair, tobacco companies have certain advantages that “tobacco companies” like Intel lack. A chemically-addicted clientele, for starters, as well as an unrivaled ability to raise prices virtually at will. Whenever a progressive-minded (or cash-strapped) city decides to hike the taxes on cigarettes, the taxes flow right through to the customer. Not too many companies have that ability.
But that said, I’m betting that Big Tech is a better investment than Big Tobacco. Investors are expecting no growth from Big Tech. So, if actual results prove to be even marginally better than disastrous, investors should enjoy a decade or more of solid gains.
Microsoft and Intel in particular may or may not ever figure out the mobile market. But that’s ok. Given that a zero percent probability is currently priced into shares, mobile success can be thought of as an embedded call option that could end up paying off in a big way. And if that option is never exercised, you’re still getting the existing businesses at “tobacco” prices.
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