Relative Strength of Tobacco Stocks

Here’s a fascinating chart I made this morning. This shows the S&P tobacco stocks divided by the S&P 500. In other words, when the line is rising, tobacco stocks are outperforming. When it’s falling, they’re trailing.

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First, notice how well tobacco stocks have done. They’ve outperformed the market over the last 25 years. In fact, this chart may understate their performance since the dividend yields of tobacco stocks tend to be higher than the overall market.

As we know, boring stocks in boring industries can be wonderful investments. If there’s any stock to avoid, it’s the hottest stock in the hottest sector.

Also, notice the periods of tobacco underperformance. Tobacco badly lagged the market from late-1998 until early 2000 (the Tobacco Master Settlement Agreement was signed in November 1998). This was an echo of the market’s tremendous bubble. Tech stocks gained so much that other stocks were forced to underperform.

Remember: A bubble isn’t stocks going from 15 times to 18 times earnings. It’s stocks going way, way, WAY out of proportion to everything and thereby distorting all valuations. That’s what happened during the tech bubble. Once the bubble deflated, tobacco stocks returned to normal.

Tobacco again outperformed in 2008. That was investors running to safety as the world was falling apart. Defensive stocks are great for rough economic times. This sector has been great for buy-and-hold investors.

Posted by on September 14th, 2015 at 1:02 pm


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