Altria Group Inc (MO)

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Where Fundamentals Meet Technicals: BTI, MO
By: Lyn Alden Schwartzer | December 22, 2020

Tobacco Stocks: Cheap and High-Yielding

Garrett recently posted a bunch of setups about rotation plays, the two that I like a lot fundamentally are both tobacco-related (even if I hate their products).

British American Tobacco (BTI) is extraordinarily cheap, pays a high yield, and consensus analyst expectations are for earnings growth:



Chart Source: F.A.S.T. Graphs

If we look at raw free cash flow, it also looks great:



Chart Source: F.A.S.T. Graphs

Ever since their big Reynolds acquisition, some of BTI’s metrics have been a bit wonky, because it takes time to digest such a large acquisition. For example, debt/EBITDA increased, while debt/assets decreased from the acquisition point:



Over time, BTI will keep consolidating its operations and balance sheet, and is generating plenty of cash for dividends. It’s not a sexy stock pick, but it has outperformed for decades, and after the past five years of severe underperformance, is extremely cheap relative to its fundamentals.

Garrett has a positive setup for it:



Likewise, Altria (MO) has a similar fundamental chart:



Chart Source: F.A.S.T. Graphs

And Garrett has a similar setup for it:



I prefer BTI due to its global exposure, but holding a small collection of cheap tobacco stocks is rational as well. Many high-yield stocks are banks or energy or real estate related, so a couple small tobacco stock positions can add a bit of diversification to a yield-centered portfolio.

More broadly, there is potential growth-to-value rotation occurring. It could be another fake-out, but given the big shift in fiscal and monetary policy this year, along with the unusually wide valuation gap between growth and value stocks, this one could have real potential:



When the line is going up, it means value is outperforming, and when the line is going down, it means growth is outperforming.

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