Tobacco stocks went up in smoke in late July 2017.
But that’ll happen after the U.S. FDA announces a new comprehensive plan for tobacco and nicotine regulation that could cut the levels of nicotine in cigarettes to help make them less addictive and easy to quit.
Part of the reason for such a push is health.
According to the FDA, the use of tobacco is still the leading cause of preventable disease and death in the country. It’s already led to 480,000 deaths a year. Worse, it’s bled more than $300 billion in health care costs and lost activity.
Shares of Altria (MO) gapped from a high of $74 to $63 on the news, falling lower to $61 in the weeks that followed. Even British American Tobacco (BTI) fell from a high of $68 to less than $61 a share.
The only related stock that didn’t take much of a hit was Philip Morris (PM), which sells a good portion of its brands outside of the U.S. We can assume PM would not be as directly impacted by FDA rulings with regards to nicotine sales outside of the U.S. borders.
For those directly impacted, though, the effort “to reduce nicotine levels, is considered by many as a monumental effort to reduce smoking, on par with the 1965 initiative to introduce health warnings on cigarette packs, and is expected to have a tremendous effect on the US$130 billion tobacco industry,” noted Vaping Post.
It may sound like terrible, damaging news. But it may have also provided an opportunity.
For one, while regulating nicotine levels is likely to have a negative effect on big tobacco, related companies began to move into safer alternatives to keep business afloat.
In fact, many have begun launching electronic smoking devices.
Philip Morris for example has spent more than $3 billion developing safer alternatives, such as the IQOS device, a smokeless alternative to combustible cigarettes. The device, launched in Japan in 2016 immediately sold out.
And two, it’s till too early to tell what the FDA may end up doing, and even how big or little of an effect any potential regulation will have. At the moment, related stocks have only sold off on the fear of a “what if.”
However, we’re beginning to see signs of sharp reversals in stocks like PM, which has already moved from $102 to $109 recently. But we believe we could see $112, near-term. While the stock is pricey at $109 a share, we still see opportunity.
There are two ways to trade PM here.
One, you can buy the stock at current market prices. And, or you can buy to open the PM March 16, 2018 110 calls at market prices.