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John R. Conway
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I currently work full-time as a chef and enjoy investing in the day time. I am a graduate of the University of Missouri-Saint Louis and reside in Saint Louis. I enjoy trading stocks and options and prefer to use deep in the money calls as a stock replacement strategy. When I am not investing I... More
  • Option play on Altria (MO) 0 comments
    Dec 21, 2011 12:38 PM
    Smoke them if you got them

    When currently looking at the market going into the final weeks before the new year there is an assortment of stocks that are currently at their 52 week highs and continue to make positive gains. The question that an investor might ask themselves, is it time to sell or will the stock keep making new 52 week highs? One stock that is currently at a 52 week high that is continuing to rise is Richmond, VA based Altria, ticker symbol (NYSE:MO)

    Altria engages in the manufacture and sale of cigarettes and smokeless production. Altria has a 60.3 Billion market cap, trades at 17.5X earnings and pays a nice 5.59% dividend. Altria trades in the consumer/non-cyclical and provides a product to people that can be addictive. Besides alcohol, in my opinion there are not many big market cap companies that can legally sell products that are addictive and continue to make profits year over year. When looking at the macro moves in the market one trend that I see is stocks that are at 52 week highs that keep making new highs. This can be seen as "stick with the winners and dump the losers" Sometimes waiting to buy options or stock on a company that is trading at a 52 week high can be tough to make, since you will likely want to wait for a pullback. What if you don't get that pullback? (

    While there are bullish and bearish cases for making trades on stocks that are at 52 week highs, I believe the market trend will work in favor of Altria going into the year end and this will continue into the beginning of the new year for the following reasons.

    1)  Smoke them if you got them. While cigarette prices have increased, smoking is one consumer staple that the majority of smokers don't want to give up until the price becomes unaffordable. Even with high prices for cigarettes in states as New York and New Jersey, smoking is a tough habit to kill and the taxes that cigarettes bring in currently help cash strapped states (Michigan and Illinois to name two).

    2) Other companies in the Consumer/non-cyclical such as Coke and Pepsi have to spend millions on advertising and marketing, While cigarette companies Altria and Phillip Morris (just to name two) don't have to worry about aggressive advertising and marketing due to US government regulations. This can be seen as positive due to high barriers to entry for wanting to enter into the sale and manufacturing of cigarettes.

    3)  Weather you enjoy or dislike global events that are happening around the world (Europe crisis for example) Altria is a play on the U.S. since a majority of its revenue and profits happen inside the US. As the U.S. continues to improve and show gains on positive macro economic data, this can benefit Altria's share price in staying at or above it's 52 week high.

    4) Dividend. Looking at yahoo's finance, Altria's last dividend was last distributed  on 13 September of .41 cents and not expected to change. Currently, this can be challenging to find companies with the market cap Altria has and that pays out over a 5% dividend The company has current earnings on 23 January 2012.

    5) Technically when looking at Altria over a 2 year time frame you will see that Altria is in a upward bullish channel. Not bad for a company that is paying you a 5.59% dividend.

    Current One year Chart Showing support at 27 since around October

                                                        Chart forAltria Group Inc. (<a href='' title='Altria Group, Inc.'>MO</a>)

    Currently, when looking at options in Altria investors might want to think about selling a call when options prices continue to rise in price since you will be able to collect the premium up front. However, I believe their is further upside to continue in Altria  and trading the trend (stocks with 52 week highs continuing to gain). On a pullback, I would want to buy calls, specifically I am looking at March 27.  This in the money call lets you make gains as the stock rises, but you are able to do this for less than outright purchase of stock; with the exception you don't get the dividend unless you own the stock. Earnings are coming up soon on January 23, 2012, so you still have time to set yourself up for an earnings play. When looking at a one year chart of yahoo one will notice that the 27 dollar range has been a nice level of support since around October. However, when you look past the 2 year chart you will see in the long term Altria has been a winner on buying on pullbacks. Good Luck!


    Disclosure: I am long MO.

    Additional disclosure: I currently own March 27 Calls
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