Negative headlines and poor market conditions sometimes conspire to create incredible bargains for true contrarians.
International tobacco stocks like Altria Group (MO) , Philip Morris International (PM) and British American Tobacco (BTI) fall into that category right now. Each is solidly profitable. All pay hefty dividends. They trade at huge discounts from their yearly highs.
I'll be focusing today on BTI as it is down the most, offers the highest yield of the three and is far cheaper, on a valuation basis, than it was at the very bottom of the 2008-09 crash.
Since 2010 BTI carried an average P/E of 15.5x accompanied by around a 4.22% yield. As of Jan. 9, 2019, BTI was offered for just 6.8x this year's expected EPS along with a projected yield of 7.55%.
Those are far better values than BTI fetched at it last six "best buying opportunities" (green-starred below), all of which provided excellent chances for trading profits. All four of BTI's "should have sold" moments (red-starred) occurred when it sold for above average multiples while paying sub-par, by historical normal, yields.
A simple regression-to-the-mean bounce supports a 12-month target price on BTI that is north of $70. Achieving that would provide about 121% upside in addition to any dividend collected along the way.
Value Line's 2021 to 2013 projected price range affirms my viewpoint. They see BTI ending up between $90 and $125 not later than five years out. From its Jan. 9, 2019, quote of $31.79 potential gains are off the charts.
Suppose Value Line is too optimistic, and long-term returns are only half as good as expected. You'd still make 22.5% to 33.5% total returns over the coming half-decade. I doubt that there are any readers of this column who wouldn't settle for that kind of return on their entire portfolio, year after year.
Still not convinced?
Independent research firm Morningstar assigns British American Tobacco their highest, 5-star buy rating. Morningstar deigns to provide future price targets. They do, however, indicate their view of present-day fair values on every stock they cover.
For BTI, that number sits at $59 per share. A return to that modest goal would equate to an 85.5% gain without even counting in dividend income.
Ignore the doomsayers. Go with the numbers. Any logical evaluation of BTI suggests tremendous upside, low risk from the already depressed price and a healthy income stream while you wait for the almost inevitable rebound.
Buy BTI shares, sell some long-term puts or consider doing both.
(This commentary originally appeared Jan. 11 on Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)