"You make a product for a penny. Sell it for a dollar, and you sell it to addicts." That's what Warren Buffet famously said about cigarettes, and that might explain why, despite huge government efforts to restrict their use, cigarettes still remain popular, and cigarette stocks remain on fire. In fact, one of the largest, Altria, is up 15,000 percent since 1980. But according to noted technician Carter Worth of Sterne Agee, Altria's flame is about to dim.
Interestingly enough, Worth's case against the cigarette maker begins with the fundamentals. Altria shares now trade at price-to-earnings ratio of 21. That's its highest multiple in over 15 years.
"When this stock was going to be put out of business by the federal government, which it wasn't, you could have bought it at a P/E of 1 to 3," Worth said. "Now you pay 21."
And Worth also notes that Altria's dividend yield, which attracts investors seeking income, is no longer as fat as it once was. Back in 2000, shares of Altria — then known as Phillip Morris — offered a 30 percent dividend yield as traders bet the company would slash its payout. That never happened, and soon enough shares rallied, lowering the dividend yield.
"It was one of the greatest trades of all time," said Worth. "You get a 30 percent dividend yield annually, and you're buying at a P/E of 3. Now you have the reciprocal." Worth says that on a relative basis, Altria's dividend yield is the lowest ever when compared to Treasurys.
The technical setup isn't much better, at least according to Worth's chart work.
Worth notes that Altria stock price has moved far above its 150-day moving average, a key technical indicator. In the previous instances where Altria has traded this far above its 150-day moving average, the stock has tended to retreat.
"When you're too far above trend, you check back," said Worth.
The stock has also traded above a well-defined trend channel that has existed since 2008. According to Worth, when stocks move too far above or below a well-defined trading range, they tend to move back within that range. In the case of Altria, a move back into its trend channel would bring it back below $45, which also happens to be its 150-day moving average. Altria currently trades just north of $50.
Said Worth, "All good things come to an end."