UPDATE: Investors should get hooked on tobacco stocks' earnings growth and pricing power, Morgan Stanley writes
By Ryan Vlastelica
The investment bank favors companies with next-generation products
Tobacco stocks have amassed a mixed record thus far in 2017, and the Food and Drug Administration's July announcement that it would lower the nicotine levels in cigarettes to nonaddictive levels (http://www.marketwatch.com/story/fda-says-it-plans-to-lower-nicotine-levels-in-cigarettes-to-non-addictive-levels-2017-07-28) was seen as adding a new layer of uncertainty for the sector, but they may be well-positioned in the event of a broader market pullback.
Pricing power, as well as the opportunity represented by next-generation products -- such as e-cigarettes -- could support the group going forward, helping it extend a lengthy period of strong earnings growth.
That view is according to Morgan Stanley Investment Management, which dismissed the potential downside of the FDA's recent move. "Our view is that any action is likely to be many years away, and is arguably balanced by the opportunity in next-generation products for those who are well positioned," the investment bank wrote in a report exclusively provided to MarketWatch.
See also:Wells Fargo: FDA plan to lower nicotine could be opportunity for Altria, Philip Morris (http://www.marketwatch.com/story/wells-fargo-fda-plan-to-lower-nicotine-could-be-opportunity-for-altria-philip-morris-2017-07-28-1291435)
There has been a huge divergence in the performance of tobacco-related stocks so far this year. While Philip Morris International Inc. (PM) is up more than 21% in 2017, a gain that's nearly twice the 12.9% rise of the S&P 500 , Altria Group Inc. (MO) shares have lost 7% over the period. Altria, which owns the Marlboro brand of cigarettes, has been pressured this year by some weaker-than-expected earnings, among other factors (http://www.marketwatch.com/story/altrias-stock-extends-fall-as-analyst-warns-against-getting-burned-by-buying-the-dip-2017-07-31).
U.S.-listed shares of British American Tobacco PLC (BATS.LN) are up 10.8% on the year; in July, the company completed an acquisition of Reynolds American.