In the past year, tobacco stocks have seen a loophole in investors’ portfolios, falling by 0.65% against the backdrop of declining cigarette sales. In contrast, the overall stock market rose nearly 20% during the same period.

To address the shrinking demand for their traditional products, leading tobacco companies Philip Morris International (PM) and Altria Group (MO) have invested heavily in the development of "smoke-free" alternatives. Their newly launched IQOS product heats tobacco instead of burning it, and is said to release less toxins, but produces a similar nicotine impulse. Philip Morris has launched IQOS in more than 40 markets around the world, and Altria launched a heat-not-burn device in Atlanta last fall. A few months later, the U.S. Food and Drug Administration (FDA) approved the product for sale in the United States.

The start of 2020 for this controversial industry is mostly disappointing, although the renewed buying interest in the group later last week may rise further in the upcoming trading day. In addition to carefully studying Philip Morris and Altria below, we will also review the tobacco leaf supplier Universal Corporation (UVV).

Philip Morris International produces IQOS smokeless products, including heated tobacco and steam products under the HEETS, HEETS Marlboro and HEETS FROM MARLBORO brands. It also sells Marlboro heating rods and council heating rods brands. The $138.47 billion company told shareholders in 2018 that it aims to generate approximately 40% of its revenue from “reduced risk” products by 2025. Earlier this month, the cigarette maker reported a 41% year-on-year increase in sales of its heated tobacco products in the fourth quarter. Philip Morris stock pays an annual dividend of $4.68, and the year-to-date (YTD) has risen 5.35%, which is 4.74% higher than the tobacco industry average for the same period as of February 24, 2020.

Since bottoming in the third quarter of last year, the company’s stock has hit higher lows and higher highs, putting it in a steady upward trend. Recently, the price broke the pennant pattern on Friday, indicating that the upward trend continues. Those who buy here should consider trailing stop-loss orders at each successively higher swing low to make profits run as far as possible. First set an initial stop loss below the low point of the pennant pattern at $86.14.

Altria Group has a market value of US$85.26 billion and produces smoke-free products in the United States. Citigroup analyst Adam Spearman raised the company's stock from "neutral" to "buy" at the end of last year, citing historically low price-earnings ratios for rating changes. Currently, the stock's price-to-earnings ratio is 10.44 times, well below the five-year average price-earnings ratio of 17 times. Although the investment in Juul Labs, Inc., an e-cigarette manufacturer, faces ongoing challenges, Altria’s non-combustible business is still affected by the launch of IQOS and on! As of February 24, 2020, Altria’s share price has fallen by 8.05%, despite The 7.44% annual dividend yield is very high, which helps to partially offset the price depreciation.

The tobacco giant’s stock price accelerated its decline after announcing its lackluster fourth-quarter results at the end of January. However, the price stabilized at the $45 level last week, finding a support area from the neckline of the reverse head and shoulders pattern. In addition, the moving average convergence divergence (MACD) line crossed above its signal line on Friday to generate a buy signal. Long swing traders should place a stop loss below this month's low of $44.86 and make a profit when testing the year-to-date high of $51.77.

Universal Corporation supplies tobacco leaf products worldwide. The 134-year-old company does not sell consumer products on its own, but purchases tobacco leaves from farmers and sells them to tobacco manufacturing companies. In early February, the company disclosed adjusted earnings per share for the third fiscal quarter of US$1.08 and revenue of US$505.5 million. CEO George Freeman said that the oversupply of flue-cured tobacco creates a selective market environment that affects sales and profit margins. The tobacco supplier’s stock has a market value of US$1.25 billion, and as of February 24, 2020, it has fallen 9.59% so far this year. Investors also received an attractive dividend yield of 6.08%.

Global stocks have been trading sideways for the past 12 months, and the recent retracement to the $49.50 support area provides an opportunity for those adopting a range-bound strategy. Traders who buy at the current level should set their profit target near the upper resistance of the current range at $56, and at the same time manage their risk by placing their stop loss below the February 19 low of $49.09.