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.

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) - Get Report

and

R.J. Reynolds Tobacco

( RJR). Marc Cohen at

Goldman Sachs

recommends

Loews

( LTR) and Philip Morris. Bill Pecoriello at

Sanford C. Bernstein

likes Big Mo, too.

They marshal many excellent arguments. The Engle verdict will not stand on appeal. Even if it were to survive, the $145 billion award is absurdly high by any historical standard and is certain to be reduced. Even then, actual payment of any award would be stretched out into the sunset, thus lowering dramatically the current value of any payment. The Florida legislature has already capped the bond requirement in class-action suits at $100 million per company.

The analysts are equally optimistic about the industry's legal challenges beyond the Sunshine State. The industry has an outstanding record of overturning lower court decisions like Engle, and no awards have yet to be paid despite all the lawsuits launched in the past decade. Even better, the industry can expect political relief from Washington if

Bush

beats

Gore

, as many political pundits are saying now. And in any event, say the financial analysts, tobacco stock prices already reflect all the bad news.

Investors with actual money at risk have had a rather less sunny reaction to Engle. Tobacco stocks are not only off since last Friday, they fell again today even after bullish conference calls held by Goldman Sachs and Morgan Stanley. (Goldman even included two law professors who supported analyst Cohen's optimistic presentation.) The

American Stock Exchange Tobacco Index

lost 2.9% today, leaving it down 9.2% since July 6 and about 44% below its January 1998 all-time high. (It's still up 28% from its March 2000 depths, however).

A Smart Investor: 'We Don't Own Tobacco'

What is going on? Is the weakness merely an overreaction to the Engle decision, as the analysts say? Or is the market smarter than that? Investors may be saying that they cannot get their arms around the legal and political risks embodied in these stocks.

That is the view of one of the most skilled and successful special-situations investors I know, a Boston-based money manager who is good enough at tricky investments to have been consulted in the past by no less an investor than

Warren Buffett

. This guy specializes in analyzing complex securities. Tobacco is nothing if not complex.

"We don't own tobacco," he says. "The odds are that something people dislike this much could be underpriced, but we can't figure these stocks out. The lesson of this industry is that just when you thought they had put their legal problems behind them, something else came out of the woods. There is no way to know when the lawsuits will abate. It all comes down to the legal risks and the legal issues, and those are not capable of being analyzed to our satisfaction."

Here in a nutshell is the problem: You would have to hire an army of lawyers and political lobbyists to handicap the legal odds for tobacco. The industry pays an estimated $900 million a year for lawyers and other outside advisors, according to

The Wall Street Journal

. You might not have such a budget.

And even if you did, you might still be wrong. Industry executives and the analysts have been saying for years that the legal threat was over-blown and that tobacco stocks are great investments. These are extremely smart people with more information about the issues than you will ever know. But they have been wrong. These stocks have been lousy-to-mediocre investments.

You Don't Look So Good. Been Smoking?
Philip Morris, R.J. Reynolds, Loews and B.A.T, three years

Tobacco is a tough call. It may be completely idiotic as a matter of public policy for the U.S. to try to resolve the status of cigarettes in the society through various state and federal courts. But that is the situation, and no one can say with certainty that things will change for the better anytime soon.

Fans of cigarette stocks like to say that the industry has yet to suffer a major legal defeat in the tobacco wars. (This excludes the $206 billion settlement between the companies and the states, struck in 1998.)

True. But should an investor take comfort from that observation? After all, the United States armed forces claim never to have lost a pitched battle with the North Vietnamese regulars or the Viet Cong. That doesn't mean the U.S. won the war.