These Inflationary Smoke Signals Show Us One Sin Stock to Grab — And One to Run Away From

By TradeSmith Research Team

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When times are tough — like when inflation soared to a four-decade high in June — “sin stocks” are often touted as recession-resistant stocks.

The reason is that folks aren’t likely to completely abandon behaviors such as drinking, gambling, and smoking during economic turbulence.

If you’ve been drinking a glass of wine every night with dinner, buying a pack of cigarettes each week, or visiting a casino once a month for years, it’s difficult to completely stop. Instead, folks are more likely to look for alternative options.

That’s what we’re seeing right now in the cigarette industry.

Because of higher gas prices and zooming inflation, investment bank Goldman Sachs used its Q1 2022 Nicotine Nuggets Survey to forecast a cigarette sales decline for 2022.

But consumers aren’t necessarily giving up their habits… they are just turning to cheaper options.

According to a National Retail Federation survey, at least half the consumers polled said rising prices had them switching to less-expensive brands.

To make sense of all this information, we’re running two tobacco companies through our proprietary trading tools — one is the largest company by market cap and the other is a discount retailer — to share what our tools are saying to do in this moment.

The Discount Tobacco Solution

Vector Group Ltd. (VGR) is a holding company with investments in real estate projects as well as tobacco operations.

Through its subsidiary Liggett Vector Brands, it offers discount cigarette brands like Eagle 20’s, Montego, Pyramid, Grand Prix, and USA. In fact, the company isn’t afraid to say it offers discount brands.

It puts a nice marketing spin on the idea of something being less expensive, saying that “Eagle 20’s is for the budget minded who don’t want to compromise on quality and taste.”

For a comparison, one pack of Marlboro Red 100’s, depending on geographical location, can cost around $8. A whole carton (10 packs) of Eagle 20’s Red 100’s can cost $29.

The company says it has a “value-focused” approach to how it sells cigarettes, placing more of an emphasis on having its products in tobacco outlets and discount mass merchandisers than the rest of the industry.

Source: Vector Group’s June 2022 Investor Presentation

Now, even though Vector may be well positioned to take advantage of consumers switching to budget tobacco brands, our system is saying VGR is not worthy of your hard-earned money.

The stock has been in our Red Zone (think of this like a stop light) for the past seven months and has a high-risk Volatility Quotient (VQ) of 32.33%.

Volatility Quotient (VQ) Level Breakdown:

  • Up to 15% = Low Risk
  • 15%-30% = Medium Risk
  • 30%-50% = High Risk
  • 50% and above = Sky-High Risk
Vector Group is expected to report earnings on Friday, and it will be interesting to see an update on how the company has been performing. But for the time being, this is a stock to stay far away from.

The Poster Child of Big Tobacco

If there’s one name that symbolizes the “Big Tobacco” industry, it’s Philip Morris.

The company’s first cigarette was sold in 1854, and the company was incorporated in 1902.

Philip Morris International Inc. (PM) was spun off from Philip Morris USA in 2008, and PM does not operate in the United States. But even without being able to sell in the U.S., it still trades on the New York Stock Exchange and is the largest publicly traded tobacco company by market cap in the world.

And while it has deep roots in “smokeable” products, the increase of regulations and more educated consumers has forced the company to be flexible.

That’s why it’s ushering in a new approach to selling its products with what it’s calling a “smoke-free future.”

The company is focusing on products that it acknowledges are not “risk-free,” but that it says “are a far better choice than cigarette smoking.”

Source: Philip Morris International May 2022 Investor Presentation

In its May 2022 investor presentation, PM listed the ambition of deriving more than 50% of its net revenues from smoke-free products by 2025.

Of course, this doesn’t mean the company has abandoned selling cigarettes.

It owns five of the world’s top-15 international cigarette brands, and it will continue to sell them as long as it can as it transitions to more smoke-free products.

Source: Philip Morris International May 2022 Investor Presentation

Running PM through our trading tools shows us that this sin stock offers a much better opportunity than VGR, as of this writing.

It’s in our Green Zone and has a medium-risk VQ of 20.35%.

PM also offers a dividend, with a hefty yield of 5.15%.

So if you’re looking for a sin stock that poses only moderate risk, offers a strong dividend, and enjoys a wide slice of the market-share pie, PM could be one to watch.