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
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 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
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.