Tobacco Stocks Ready to Ignite

Providing the spark: diminished prospects for a federal lawsuit -- and a coming round of cigarette price hikes

By Richard Joy

Tobacco stocks are smoking as the threat of government litigation against the industry diminishes.

According to press reports, the Bush Administration may cut off funding for the Dept. of Justice lawsuit against the tobacco industry. The suit seeks to recover $100 billion from Big Tobacco to reimburse the government for treating sick smokers. S&P believes the lawsuit will ultimately be dropped, given the government's weak case.

Stocks in the group are also benefiting from expectations for another round of cigarette price increases to fund settlement obligations. S&P believes price hikes are likely by the end of the second quarter.

The best-positioned stock in the group? Philip Morris (MO ), ranked 5 STARS (buy) by S&P, given its strong fundamentals, defensive appeal and the coming IPO of its Kraft food unit.

Joy follows food, beverage and tobacco stocks for Standard & Poor's

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