Profiting in politically incorrect industries

I’ve been finding value in the stocks and sectors that might be considered politically incorrect. For example – according to our current government overlords, we are to shun the following:

  • Air travel to international destinations
  • Fossil fuel use
  • Coal
  • Alternative opinions from the party line

While I can’t figure out a way to trade the free speech impediments, I do believe there are huge opportunities that lie in airlines, oil and gas, and coal. Click on the links to see my writeups on those three sectors.

One politically incorrect sector that recently caught my eye is the tobacco industry. Like the coal trade, this industry has its dark side. Both industries have declining usage in much of the developed world. Both industries have products that negatively impact the environment and/or human health. And yet – both industries continue to have a market. Particularly in China.

According to the WHO (World Health Organization, not the famous rock group!) South East Asian Region has the highest rates of tobacco use, with more than 45% of males and females aged 15 years and over.  But the trend is projected to decline. However…The Western Pacific Region, including China, is projected to overtake South East Asia as the region with the highest average rate among men.

China opened its childbirth policies about two years ago. Chinese families are no longer restricted to one child, but that hasn’t resulted in a baby-boom thus far. Nonetheless, with economic expansion as a top priority (see my blog comments for both the oil and gas industry and the coal industry on the links above), it might make sense that a growing population is inevitable. A cultural indifference towards the negative health consequences of tobacco usage, a potentially growing population, and the highest percentage of smokers in the world, might suggest an opportunity in this downtrodden sector.

If we look at the Dow tobacco index, we can see that the industry has been under pressure since 2017. But a technical base and break of the downtrend seems to have set in over the past year. The safest place to buy this chart would be after the neckline around 700 is broken. Rising peaks and troughs on the chart suggest early buyers might have a fair chance of seeing that neckline broken, but that’s a risk.

I went through the entire index of tobacco stocks in an effort to find the most attractive technical profiles. Below you will see my list, with brief technical commentary:

Philip Morris (PM) appears to be breaking out. The upside is reasonable, but not massive to technical resistance in the mid-high $90’s. We own a small position in PM in our Aggressive strategy.

Altria (MO) is a bit more encouraging. A major component of the index, it bears close resemblance to it. A firm break through $46 would imply about $60 as a target.

Finally, one to keep an eye on is Imperial Brands (IMBBY). The downtrend is officially still in place, but the recent run to $22 tested prior resistance from 2019. If the stock penetrates resistance, it would have considerable upside – possibly as high as the old highs near $40. But…we need to see that break.

Conclusion

We are not yet invested in this sector – and most have not broken out.  PM being the one exception to that observation- we own a small position in that stock per my comments above. But the prospects upon a breakout in some of the above charts suggest good upside potential. Tobacco may be a politically incorrect, but profitably correct trading opportunity. Keep an eye on tobacco – it isn’t quite there yet, but time may change that status.

Weekly video recap posted

Every week I record a YouTube video. Its about 10 minutes in length highlighting that weeks blogs AND a special “bonus chart” not posted on my blogs. Make a point of visiting our “Smart Money/ Dumb Money” video page each week to catch the video.

Here is last Friday’s video.

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