Tobacco Stocks: Hazardous To Your Wealth?

For investors, lawsuits cast a smoky cloud over the future

Was it a hiccup or a full-fledged smoker's hack? When Liggett Group Inc., the cigarette-manufacturing division of Miami's Brooke Group, broke ranks with the tobacco industry on Mar. 13 by agreeing to an unprecedented litigation settlement, the move sent cigarette stocks plummeting 13%. In just one week, $17 billion in market value was erased.

Stock prices have since steadied, but some shareholders are casting a more critical eye on their investments. In Florida, one of the six states suing the industry for reimbursement of smokers' health-care costs, Attorney General Robert A. Butterworth proposed on Mar. 20 that the state, which owns close to $700 million worth of tobacco stock, should put pressure on other tobacco companies to follow Liggett's agreement--and stop marketing aimed at teenagers. The day before, New York Comptroller H. Carl McCall had announced that he would become more active in monitoring the state's tobacco investment and would add no more tobacco shares to the state's discretionary investment funds.

LONG DECLINE. Ominously for big tobacco, New York's rationale had nothing to do with social responsibility and everything to do with stock volatility. "There are some who say the risks are already reflected in tobacco prices," says McCall, "but we think that the risk might expand." Such sentiments could encourage other investors of public money to reconsider their tobacco holdings. "The states sniff money coming out of tobacco, and this can mnly accelerate," says Peter D. Kinder of Kinder, Lydenberg, Domini & Co., which specializes in socially responsible investing.

Such talk could depress tobacco stocks over the long haul. But some long-term holders are hanging in there. Both Stephen Yacktman, who oversees tobacco investing at Chicago's Yacktman Asset Management, and Stephen O'Neil, senior equity trader for Arco's $2.5 billion fund, bought Philip Morris last week. "There's a core of people who understand this group well, and they have held these stocks for a long time," says O'Neil. Defending the purchase, Yacktman says: "Philip Morris is where you want to be."

Still, if tobacco's litigation woes continue, even steadfast supporters may consider kicking the habit.

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