News Analysis date published New: 
Thursday, August 9, 2012 - 07:30
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Monday, August 13, 2012 - 13:47
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Thursday, August 9, 2012 - 07:30

This "Hated" Stock is Making Investors Rich

Thursday, August 9, 2012 - 7:30am

There is no question that smoking is a dirty, unhealthy habit. I can remember back when smoking was popular. The smell of cigarette smoke permeated nearly everything, particularly public spaces and offices. Even in high school, where it was banned inside, there was a smoking area outside the cafeteria and restrooms were often clouded with gagging smoke. In other words, it seemed like almost everyone smoked. You would see it on TV, talk shows -- even famous athletes smoked regularly. Believe it or not, Great Britain's 1984 Olympic Silver Medalist Hurdler Shirley Strong was a smoker!

Then, everything seemed to change. The government declared war on smokers and tobacco companies. It followed with waves of anti-smoking propaganda, taxation and a massive class-action law suit against tobacco companies. Smokers saw these actions as an assault on personal liberty, while the anti-tobacco movement claimed to be saving lives and cleaning up the environment. As billion-dollar verdicts were handed down against the tobacco interests, the public perception of smoking changed radically in the Western World. Once regarded as "cool," smoking evolved into a marginalized activity generally reserved for addicts and rebels.

But in emerging markets outside of the United States, smoking is still considered a "cool" activity. Savvy tobacco companies have turned their focus to these niche markets in search of profits. Given how addictive cigarettes can be, poor economic conditions do little to hinder demand. Think of smoking as a cheap high that can quickly become addictive. This is the demand trigger that tobacco companies exploit.

I'll leave the moral judgment to others, as our purpose here is to find profitable investments.

Recently I was shocked when my stock screening system discovered a stock in this sector that is making investors wealthy. This stock has spiked 16% since June 1 and is up 135% since March 2009. It has a market capitalization of more than $100 billion, with a book value of $13 billion. The price-to-earnings ratio came in at about 21 with a dividend yield of about 3.9%.

Sound like a solid investment? You bet!

The company my screens identified is British American Tobacco (NYSE: BTI). It's headquartered in the United Kingdom and is the world's second-largest tobacco company. British American has more than 200 brands of tobacco products and boasts a dominant market share in more than 50 markets.

Almost unbelievably, the company sold 705 billion cigarettes in 2011. As you may imagine, it is among the top-60 companies worldwide by market capitalization. We are talking the big leagues here.

Even more interestingly, the company was included in the Dow Jones Sustainability World Index for responsible businesses due to its efforts in that regard. What does it take for a tobacco company to be honored in the Dow Jones Sustainability Index? To make the list, the company has offset the negative aspects of its business with positive environmental initiatives.

The company also resumed its stock buyback program in February and has reported a sales increase across many of its various brands.

The company is in a solid uptrend. Bouncing from a low in the $93 range on June 1, shares have skyrocketed to more than $108 in 9 weeks. The rally was interrupted by a short, sharp sell-off during the 3rd week of July. But shares were quickly bought on the dip, pushing the price to the current all-time highs.

Risks to Consider: Tobacco has a bad stigma. British American faces strong challenges from regulations and class-action suits. In fact, the company currently has multiple cases in litigation across the globe. It has also been forced to clean up tobacco farm sediment in Wisconsin's Lower Fox River. These expectations are normal with a company this large, as they make a huge target for fee-hungry lawyers -- not to mention the precedents set in previous tobacco litigation.

Action to Take --> Despite the negatives, British American Tobacco is a solid company with strong fundamentals. I like this stock as a break-out play right now. Buying on a close above $110 makes solid technical sense. Stops should be at $105 for this entry level with a target price of $125 within 20 months.

P.S. StreetAuthority co-founder Paul Tracy profiled this stock in a recent High-Yield International issue, highlighting the company's strong dividend growth -- 14% annually for the last 10 years. To learn more about Paul's high-yielding stock picks, read this special report.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.