Is Altria Group (MO) A Great Investment Choice?

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Broyhill Asset Management, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. Since the availability of vaccines was announced in the fourth quarter of last year, the portfolio has appreciated materially, generating strong absolute performance and attractive returns relative to broad market indices. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Broyhill Asset Management, the fund mentioned Altria Group, Inc. (NYSE: MO) and discussed its stance on the firm. Altria Group, Inc. is a Richmond, Virginia-based tobacco company with an $89.9 billion market capitalization. MO delivered a 19.10% return since the beginning of the year, while its 12-month returns are up by 10.88%. The stock closed at $48.47 per share on August 20, 2021.

Here is what Broyhill Asset Management has to say about Altria Group, Inc. in its Q2 2021 investor letter:

Altria (MO) shook off the prospects of a ban on menthol and a potential cap on nicotine and gained 20%. We shared our thoughts on these regulations during the quarter, which are available here.

MO Valuation. MO is up ~ 18% YTD (even accounting for the recent sell-off). We expect MO to generate close to $5 in annual FCF per share over the next few years, putting the stock at ~ 10x, which is less than half the market’s multiple today. Over the last decade, shares have traded at an average multiple of 15x and within a range of ~ 10x – 20x (+/-1 standard deviation). The stock yields 7.2% at the current price, close to a 6% premium to treasuries. Historically, shares have traded closer to a 3% premium to the 10Y, which would imply a ~ $75 share price.”

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Based on our calculations, Altria Group, Inc. (NYSE: MO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. MO was in 47 hedge fund portfolios at the end of the first half of 2021, compared to 38 funds in the previous quarter. Altria Group, Inc. (NYSE: MO) delivered a -2.93% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.