Lorillard (LO) — With a $19.3 billion market cap, this fantastically successful cigarette and e-cigarette manufacturer is a relatively small fish in a small pond, which appears to be a good thing at the moment. Rumors are circulating that Reynolds American (RAI), the next biggest fish in the pond with a market cap $28.7 billion, may be interested in acquiring LO so that, together, they might be more competitive against big fish Philip Morris (PM) and Altria Group (MO).
When these rumors first surfaced at the beginning of March, LO jumped 16% to a 52-week high of $56.85. Following the initial burst higher, the stock pulled back and consolidated around $52. That is until Wednesday, when it broke out of a bullish pennant — a classic bullish continuation pattern. LO could easily jump back up to its early March highs in a matter of days. While this short-term 6%-plus move would be exciting, it is only the beginning of the bullish possibilities for LO.
Traders on Wall Street are starting to readjust their portfolios. They’ve been moving some of their assets out of riskier, small-cap momentum stocks and into more conservative, dividend-paying stocks, which should be good for LO in the near term. The company has a 4.7% yield and has consistently increased its dividend for years. This type of stable dividend payment is just what frazzled traders who have been riding the momentum train higher and higher for the past few years are looking for.
Since this trade may take off quickly, we recommend entering the stock now that it has broken out of its consolidation range. Set your first price target at $56.75, near the high reached on March 4.
John Jagerson and Wade Hansen are the co-founders of LearningMarkets.com, a source for free investment education and daily analysis of the stock, options and Forex markets. Wade is the co-author of Profiting With Forex: The Most Effective Tools and Techniques for Trading Currencies (McGraw-Hill, 2006). John Jagerson has worked in the capital markets and private equity for most of his career, including investing, writing, education and money management. Together, John and Wade are the editors of Slingshot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today by clicking here.