Smoke them if you got them.
As the market concludes in the final weeks before the new year there is an assortment of stocks that are respectfully at their 52 week highs and continue to make positive gains. Some of these prominent stocks include Starbucks (NASDAQ:SBUX), Wal-Mart (NYSE:WMT) and Amgen (NASDAQ:AMGN). The question that an investor might ask is whether or not it is time to sell, or if the stock will keep making new 52 week highs? One stock that is currently at a 52 week high and continues to rise is Richmond, VA based Altria (MO).
Altria engages in the manufacture and sale of cigarettes and smokeless production. The company contains a 60.3 billion market cap that trades at 17.5X earnings and pays a 5.59% dividend. Altria trades in the consumer/non-cyclical sector 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 after year. When looking at the macro moves in the market, one trend that I notice is stocks that are at 52 week highs keep rising to new highs. This trend 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 investors will want to wait for a pullback. What if you don't get that pullback?
While there are "bull-and-bear" cases for making trades on stocks that are at a 52 week high, I believe the market trend will work in favor of Altria going into the year's end and 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 do not 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, for example Michigan and Illinois.
2) Other companies in the consumer/non-cyclical sector such as Coke (NYSE:KO) and Pepsi (NYSE:PEP) have to spend millions on advertising and marketing. Cigarette companies like Altria and Phillip Morris (NYSE:PM) (just to name two) do not have to worry about aggressive advertising and marketing due to U.S. government regulations. This can be seen as a positive effect due to high barriers of entry for competitors wanting to enter into the sale and manufacturing of cigarettes.
3) Whether you enjoy or dislike global events that are happening around the world. Altria is a bet on U.S. growth 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, maintaining its 52 week high.
4) Dividend. Altria's last dividend of .41 cents was last distributed on September 13 and is not expected to change. It can currently can be challenging to find companies with the market cap Altria has and pays out over a 5% dividend. The company's next earnings report is on January 23, 2012.
5) Technically, when looking at Altria over a 2 year time frame, you will see that Altria is in an 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:
When looking at options in Altria, investors might want to think about selling a call when options prices continue to rise in price. However, I believe Altria has further upside to continue and trading the trend "stocks with 52 week highs continuing to gain." On a pullback I look at buying March 27 strike calls. This in the money call lets you make gains as the stock rises, but you are able to do this for less than the outright purchase of stock, with the exception that you don't get the dividend unless you own the stock. At the current stock price an investor of the 27 calls will have about $2.75 of downside protection and Altria would have to fall roughly 9% to reach the 27 level.
Altria's current stock price is 29.92 and if an investor was to purchase the March 27 calls your breakeven would be twenty eight cents (the price of the March 27 contract added to 27 strike 3.20 + 27= 30.20). Now take 30.20 minus the current stock price and all one needs is a small move in Altria to make a profit. Earnings are coming up on January 23, 2012, so investors still have time to set themselves up for an earnings play. When looking at a one year chart of Altria, one will notice that the 27 dollar range has been a level of support since around October. However, when you look past the 2 year chart, investors will see in the long term Altria has been a winner on buying on pullbacks. Good luck!
Disclosure: I am long MO.
Additional disclosure: Long March 27 Calls.