Altria’s stock extends fall as analyst warns against getting burned by buying the dip

Shares of Altria Group Inc. resumed its selloff on heavy volume Monday, with RBC Capital warning investors not to blindly follow history by buying the dip.

The cigarette maker’s stock MO, -2.94%  dropped $1.97, or 2.9%, to close at the lowest level since Dec. 6, 2016. Volume topped 26.5 million shares, about four times the full-day average of 6.6 million shares, according to FactSet.

The stock had plunged 9.5% on volume of 54.4 million shares on Friday, the biggest one-day selloff since November 2008, after the Food and Drug Administration proposed lowering nicotine levels in cigarettes to help prevent addiction.

RBC analyst Nik Modi upgraded Altria’s stock to sector perform from underperform, but kept his stock price target at $62, which was 4.6% below Monday’s close of $64.97.

Modi said large regulation-related “price shocks” have proved in the past to have created attractive buying opportunities, but he believes this time is different for a number of reasons:

Contrary to some reports, Modi doesn’t believe Altria is a near-term buyout candidate. He places a “5% takeout probability” on Altria over the next 18 to 24 months.

Despite the stock’s selloff, valuation is only “fair,” as a rising rate environment makes the dividend yield less attractive.

Fundamentals are under pressure, as witnessed by the second-quarter earnings miss and the continued loss of market share by its flagship Marlboro brand.

Modi is unwilling to make a “leap of faith” on the launch of the IQOS smokeless cigarette product in the U.S. given the limited visibility on potential regulatory issues.

Modi said regulatory related share selloffs have been buying opportunities in the past, because tobacco stocks tend to be driven more by “money flows, fundamentals and movements in interest rates” than by litigation and regulatory overhangs.

“But this time could be different,” Modi wrote in a note to clients. He said he was “breaking with our long-held view to ‘buy the dips,’” not because of the FDA’s announcement, but the reasons cited above.

Don’t miss: Cigarette maker stocks plunge on FDA announcement, but health experts are skeptical.

Wells Fargo analyst Bonnie Herzog provided a contrary view. She expects the FDA decision to ultimately prove a positive for big tobacco as consumption shifts to smokeless cigarettes, and said she believes the probability that Philip Morris International Inc. PM, -1.52%  acquires Altria remains high. Herzog reiterated her outperform rating, and encouraged long-term investors to “buy the dip” in Altria’s stock.

After outperforming its sector peers and the broader market by a wide margin in 2016, Altria’s stock has gone the other way this year. It has fallen 3.9% year to date, while the SPDR Consumer Staples Select Sector exchange-traded fund XLP, -0.04%  has gained 6.9% and the S&P 500 index SPX, -0.07%  has climbed 10.3%.

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