Quality tobacco as the economy goes up in smoke

  • Stockpiles of ultimate sin offer refuge
  • Now is not the time to buy dips, but to start an American watchlist

Readers may remember old television commercials where an unhappy man would light a Hamlet cigar after resigning himself to misfortune. It would appear that policymakers face many such moments as the economic situation deteriorates. For investors who can dispel any moral concerns about tobacco companies, it’s the companies’ stocks that could offer some respite as the economy seemingly heads into recession. Hamlet is a brand owned by the Gallaher Group division of Japan Tobacco, but their UK-listed competitors are among the stocks at the top of our quality screen. Imperial Marks (IMB) is one of only two UK large caps to achieve the top rating. British American Tobacco (BATS) also ranks highly, failing only the return on equity growth test. This is a caveat – the industry no doubt faces some long-term headwinds – but as a cyclical defensive game there may be a few more puffs left on the metaphorical cigar.

The stock prices of a few pandemic darlings have fallen significantly in recent months, but they still rank reasonably well on our screen. Future release (FUTR) saw its share price drop nearly 40% in three months. Discretionary spending can be expected to suffer given the rising cost of living and the likelihood of a recession, so this is more of a company to keep on a watch list for the next round. Although stock markets tend to recover before the economy, investors should therefore be on their guard when quality companies become cheaper.

This certainly applies to companies that pass all of our quality tests on our US screen. The tastes of Apple (US: AAPL), Microsoft (US: MSFT) and Nvidia (US: NVDA), which still pass all of our tests despite significant three-month share price declines. However, volume patterns suggest further in the legs of the upcoming bear market, so now is not the time to buy a drop in these tech stocks. Still, the quality metrics are worth watching to be ready.

Download PDF

Comments are closed.