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The MO Factor: Philip Morris / Altria Corp Circa 1999

Back in 1999 it looked like doom was on the horizon for Phillip Morris, NYSE: MO, now know known as Altria corp. Despite decent profits, the company was being attacked from all sides by lawsuits and politicians intent to destroy the tobacco industry. For a brief period in late 1999, MO was trading at multi-year lows at under 20 per share. The future looked bleak. Meanwhile, everyone’s favorite Nazdog tech stocks like ARBA and LNUX were partying like it was 1999.

In 1999, MO was the cancer of the Dow. Analysts were downgrading the stock almost daily on fears of trillion dollar judgments by bleeding heart juries. There was no hope in site. Even those that might have believed in the future of the company were discouraged from buying just by comparing the returns that they could be getting on tech stocks, some of which were doubling every few months.

The tables have turned today. Go look up a quote on MO right now and you’ll see that the stock has more than tripled from its 1999 lows. What the chart doesn’t tell you is that around $12 in dividends per share has been paid since then. Buyers have more than quadrupled their investment.

Market Uncertainty

Why have returns on MO been so generous since 1999? The obvious reason for any stock price increase is an unexpectedly successful business, but that really isn’t the case with MO. The company has no doubt been successful over the last five years, but their earnings growth has been relatively modest.

Favorable lawsuit news was not the culprit either. The company won some lawsuits and lost others, which was predictable beforehand.

The real reason for MO’s breakout performance was the market undervaluing the company’s future business prospects due to uncertainty back in 1999. Talking heads on the TV love to spout lines like “the market hates uncertainty”, and that statement is basically true.

Sheep hate uncertainty because they can’t accurately predict the future and don’t know how to act. They sell by default at any price just to get out of facing the big bad unknown.

Intelligent investors love uncertainty, it gives them the opportunity to rationally evaluate risk. In MO’s case, the risk at hand was the possibility that the company would be bankrupted by lawsuit judgments. Forget about hindsight, it could easily have been determined beforehand that MO would not be bankrupted by legal action. Very rarely do courts kill the beast when damages are owed. Instead, businesses are put on a kind of payment plan to ensure that all those owed get paid over time.

So it’s 1999 and we know that bankruptcy fears are irrational, and chances are that MO will win some lawsuits and lose others. Do you buy at this point? If you say “yes” then you just quadrupled your investment.

What You Can Learn From MO

There are many money managers who do not evaluate risk properly. You can profit from the MO of the future by learning to evaluate risk with a clear head.

Today there are several Dow stocks that fit the MO profile very well. When the market has sold off a stock as if bankruptcy happened yesterday and fund managers would rather own a pile of horse manure than shares of said company, that is the time where smart risk evaluators make their profits.

Article by Ninjak


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