Wednesday, January 31, 2007

Tobacco and the New York Times

Today the New York Times published a front page, above the fold story about Altria Group, one of the best performing stocks of the bull market that began in 2002. Its monthly chart is above this post.

I have been bullish on Atria for 6 years now, but I think this story is the proverbial "kiss of death" for MO (Atria's symbol on the New York Stock Exchange). I think we shall see MO make a long term top in the 90-100 range and then begin an extended drop which will carry it at least to 60 and probably much lower than that.

Remember that these are "pre-spinoff" numbers. Altria plans to distribute 0.7 shares of Kraft for every Altria share. So at current market prices this means that about 24 dollars of Atria's price is accounted for by its holdings of Kraft. So "post-spinoff" the zone for the top would be 66-76 and the downside target for MO would be 36 or lower. The record date for the spinoff is March 16 so on Monday, March 19 there will be a big downward adjustment in the market price of MO equivalent to 70% of the price of Kraft at the time.

Altria currently owns about 89% of Kraft Foods. KFT's monthly chart is also above this post. There have been widely circulated stories to the effect that after MO divests itself of KFT the shares of the latter will tank because of the sale. Of course this is nonsense because the market has been anticipating this divestiture for several years now. But in fact I think the situation is emphatically bullish for KFT. After the divestiture I expect to see KFT embark on a long term bull move that will carry it up to 70.

For another comparison of market sentiment towards MO and KFT take a look at the second half of Kevin Delaney's column in today's Wall Street Journal. According to Delaney, 9 of the 13 analysts who follow MO have buy recommendations on the stock, while 17 of the 20 who follow KFT say sell or hold !!!

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