Beginning in March of 2021, KCR’s quantitative research has provided consistent evidence that Staples and Energy stocks present investors with the opportunity to buy companies of high quality for unusually low prices.  Subsequent to our evidence-based models’ endorsement, we engaged in a fundamental review of both sectors and the specific stocks our models favored.  Steeped in academic research done by the most respected names in behavioral finance, our models continue to advocate for select securities in both sectors.  Our fundamental overlay continues to validate those findings.

Consistent with quantitative best practices, our firm’s models rank securities from most appealing to least appealing based on heavily researched factors with ex-ante predictive ability.  There is no denying the factors and algorithms used to inform our ranking methodologies are more sophisticated than many popular three and four-factor models.  Fortunately, their utility and implementation at the portfolio and research level provide simple and low-cost solutions for investors and researchers alike.  To see why our proprietary ranking model likes the stock click here.

MO Stock Chart: Absolute Returns

  • The chart shows the performance of tobacco products firm Altria Group over the last 3 years
  • Since the stock’s trough in October of 2020, it has risen over 67%
  • Despite the stock’s performance, the firm still carries a price-to-earnings ratio below 10x[i]
  • This PE ratio does not adjust for MO’s 10% position in Anheuser Busch InBev, worth ~$10bn
  • Behavioral errors often give investors the feeling that they “missed” a stock after it has risen, but our quantitative models continue to rank the stock as one of the best in the S&P 500

Altria Absolute Performance over the Last Three Years

MO’s Stock Price Relative to the Market: The Case for Investigation

The chart below shows the same chart as the one above.  The only difference?  The chart below shows MO’s price performance relative to the S&P 500 over the last three years.  Despite Altria’s strong share price performance since October 2020, it has lagged the Index over the trailing three years.  Our models suggest the stock is still significantly undervalued despite its strong balance sheet, stable earnings, and robust dividend yield.

Based on history, these empirical factors signal that MO’s stock should continue to outperform the market.

Altria Relative Performance to the SP500 over the Last Three Years

Altria Earnings Stability, Low PE Ratio and Prodigious Yield Make the Stock Appealing

Our models use data-driven evidence to exploit the behavioral errors that turn investors into their own worst enemies.   If we remove our emotions and focus on the data, MO has numerous factors that suggest it should continue to outperform.

The data below is our Single Company Heat Map for MO. For all numbers, higher is better. The basics:

  • Valuation Quintile 5: MO has a 6.5% FCF/EV, the 82nd percentile of our S&P 500 Universe, pays a healthy dividend to investors (6.6%) while using leftover cash to repurchase stock (2% buyback yield)
  • Balance Sheet Quintile 3: MO has an average score on balance sheet quality
  • Earnings Quality 4: the stock’s high-quality earnings score stems from high ranks on the change in inventory relative to sales, healthy accruals/assets, and very high and stable margins

Single Company Heat Map for MO

MO Earnings & Company Fundamentals:

Normally this is where KCR includes a succinct walkthrough of our fundamental review of the stock in focus.  For this report’s purpose, we will omit that work.   Altria sells the leading brand of cigarettes, Marlboro, among many other popular brands.  The firm also sells a collection of the most widely recognized and used moist smokeless tobacco products, “MST”.  More recently, the firm has made acquisitions that have put them in the business of selling oral nicotine pouches, heated tobacco products, and e-vapor products.

One of the reasons MO’s stock price is so cheap is the firm’s many legal challenges, their mixed to poor track record on acquisitions that attempt to diversify the firm’s sources of revenues, and a general aversion by some investors to owning the makers of products adverse to consumer health.  KCR is not here to minimize or diminish the importance of these issues.

What we do see is that the cooperation between the government and tobacco companies has caused a relentless decline in the number of cigarette smokers.  Regulation, taxation, and education have been effective at reducing the incidence of smoking.  The firm’s other product lines are increasingly focused on “harm reduction” – providing smokers with a safer alternative.

The very items that make MO stock so cheap despite its robust fundamentals indicate the stock is shrouded in pessimism.  For those looking for a deep-dive review of the company’s fundamentals, Devin LaSarre has written a terrific summary of the firm, which you can find here.

If you have any questions about our quantitative stock ranking methodologies or the academia and evidence that underpins the factors driving them, we encourage you to reach out to one of KCR’s team members.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

[i] Data from Bloomberg, excludes the non-cash write downs of interests in Anheuser Busch InBev – a position that has a current equity value of approximately $10bn

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seek independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling, or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as a result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

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