Lorillard, Philip Morris, and Reynolds American
By now, it’s probably safe to assume that everyone knows cigarettes are bad for you. But, given the intensely addictive nature of nicotine, it turns out that smoking is one bad habit that’s tough to legislate away. Many states and cities now ban smoking altogether in indoor spaces, and Kent cigarette packs are always a popular target when lawmakers are looking to raise taxes.
Nevertheless, the breakout price action of tobacco stocks suggests that these fundamental challenges simply aren’t enough to put a dent in consumers’ all-powerful craving for another cigarette. Let’s take a closer look at sector standouts Lorillard Inc. (LO – 108.99), Philip Morris International Inc. (PM – 68.12), and Reynolds American, Inc. (RAI – 38.23) to see if this positive price action can continue.
Lorillard (LO)
North Carolina-based LO is probably best known for its Newport brand of menthol smokes, which accounted for 90% of sales revenue in 2010. The stock bolted higher in mid-March, after the findings of a Food and Drug Administration (FDA) review panel led many analysts to conclude that a menthol ban was relatively unlikely.
The security is now sitting on a year-to-date gain of nearly 33%, having outperformed the broader S&P 500 Index (SPX) by 30 percentage points during the past 40 sessions. LO’s precipitous rise during the past couple of months has been underlined by its 10-day moving average, which hasn’t been breached on a daily closing basis since March 16.
In light of LO’s positive price action, short sellers have been hitting the exits. Short interest deflated by 24.3% during the past month, yet these bearish bets still account for a healthy 7.2% of the equity’s float. At LO’s average daily volume, it would take more than eight days for all of these shorted shares to be covered — pointing to a healthy supply of sideline cash to fuel future gains.
LO could also benefit from bullish analyst attention. Thomson Reuters pegs the stock’s average 12-month price target at $113.14, representing a slim 3.8% premium to Wednesday’s close at $109.02. Plus, Zacks indicates that only eight analysts are currently following the shares, and four of those have doled out lukewarm “hold” ratings. Any upgrades or price-target hikes from this skeptical group could draw some new buyers to the table.
Traders looking to capitalize on a continued uptrend by LO may want to consider the equity’s June 100 call.
Philip Morris (PM)
Philip Morris CEO Louis C. Camilleri got a taste of his own shoe leather earlier this week, after the exec told a cancer nurse that cigarettes are “not that hard to quit.” However, what the Marlboro maker lacks in PR savvy, it certainly makes up for with positive price action.
The stock has added about 16.5% year-to-date, easily besting the 7% gain collected by the SPX during the same time frame. In fact, PM tapped a new all-time high of $69.92 on May 2. The shares have since consolidated some gains, but are now resting on support at the $68 level and their 20-day moving average.
Most analysts already maintain an upbeat view of PM, with Zacks reporting eight “buy” or better recommendations out of 10 total ratings. However, there’s plenty of room for price-target hikes going forward. Thomson Reuters places the equity’s average 12-month price target at $71.40, representing a slim premium of 2.1% to PM’s all-time peak.
A continued unwinding of short interest could also be a boon for PM. The number of shares sold short fell by 8.3% during the past month, but the current accumulation of short interest would take 4.5 days to buy back, at PM’s average daily volume.
Traders hoping to take part in a continued rally by PM may want to consider the stock’s June 62.50 call.
Reynolds American (RAI)
Like its sector peers, RAI is a technical standout. As a matter of fact, the maker of Camel and American Spirit cigarettes tagged a new record high of $38.26 just earlier today, with the shares building on their 52-week advance of 40%. The most recent leg of RAI’s uptrend has been highlighted by support at its rising 10-day and 20-day moving averages, which haven’t been breached on a daily closing basis since March 18.
With the stock cruising deeper into record-high territory, there’s plenty of room left on RAI’s bullish bandwagon. Out of the eight analysts following the shares, only three consider RAI worthy of a “buy” or better rating. Plus, the stock’s average 12-month price target of $37.10 represents a discount to today’s new high. Any upgrades or price-target hikes from this skeptical group could help RAI extend its longer-term uptrend.
Like analysts, very few options players are betting on additional upside for RAI. Peak call open interest for May lies at the in-the-money 32.50 strike, and there are virtually no out-of-the-money calls in open interest in the back-month June series. In other words, it’s a safe bet that RAI won’t have to battle options-related resistance during the near term.
Traders looking to take part in the next leg of RAI’s ascent may want to consider the security’s June 33 call.
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