Tobacco: A Buying Opportunity or a Quagmire?

Let's put the Engle case into perspective. In particular, let's look at the Florida jury's decision to stick the U.S. tobacco industry with a $145 billion penalty from the investor's perspective.

See Also
Warning: Tobacco Shares Best Suited to Industry Loyalists
$145 Billion Tobacco Award Was Priced Into the Market

Stock investing is all about buying companies' future cash flows. Tobacco companies gush cash. Cigarettes cost little to make and can be sold at a huge markup to a customer base significantly addicted to the product. Cigarette stocks trade at 5 to 6 times this year's earnings. This is the appeal of the cigarette companies. They promise steady cash flow at extraordinarily cheap prices.

The investing questions are: If I invest, will I get my fair share of the cash? To whom does the future cash belong? To me? Or to plaintiffs, lawyers and state and federal governments? If you, the shareholder, do not have a clear claim to the cash, the innate profitability of the cigarette business is beside the point.

The best Wall Street analysts continue to tell investors to put money into cigarette stocks. David Adelman at Morgan Stanley Dean Witter likes Philip Morris (MO Quote) and R.J. Reynolds Tobacco (RJR Quote). Marc Cohen at Goldman Sachs recommends Loews (LTR Quote) and Philip Morris. Bill Pecoriello at Sanford C. Bernstein likes Big Mo, too. ...