The winning season for tobacco stocks may be about to go up in smoke. According to recent reports, the U.S. Food & Drug Administration (FDA) is planning to move forward with a ban on menthol products, including menthol cigarettes. Tobacco producers have spent the past six months watching shares rise. Now, this policy shift threatens to significantly reduce some of their most popular products.
While the bad news closes in on tobacco stocks, broader market forces are keeping them elevated today, however. Some names have seen slight rallies today, though they are not likely to continue. After falling in pre-market trading, Altria (NYSE:MO) closed up more than half a percent. Philip Morris International (NYSE:PM) also closed up by nearly 1%. Finally, British American Tobacco (NYSE:BTI) closed slightly down this afternoon.
Let’s take a closer look at the complicated road ahead for tobacco producers.
What’s Happening with Tobacco Stocks?
For now, tobacco stocks are able to ride the wave of positive momentum that is elevating markets today. It also helps that Altria recently reported positive earnings. Cronos Group (NASDAQ:CRON), a cannabis producer in which Altria has a stake, also rose by 4% today. However, Big Tobacco still faces a battle ahead.
Spurred by rising Covid-19 cases, people rushed to stock up on consumer staples earlier in the year. That was a boon for tobacco producers. But how much of Big Tobacco’s revenue would be eliminated by the proposed ban?
CNBC reports that menthol products account for “more than a third” of cigarettes sold in the States. Not only that, the mint flavor is very popular among a variety of demographics. A potential ban on menthol products would certainly be a blow to Big Tobacco producers, who have long been reliant on the category as a primary sales driver. The ban would also apply to flavored cigars, another popular item. According to Matthew Myers, president of the Campaign for Tobacco-Free Kids, the federal ban would be “the most aggressive action taken by the FDA against the industry since Congress gave the agency the authority to regulate tobacco products in 2009.”
That said, the ban is still only a policy proposal. It’s in the early stages of review and tobacco interest groups are likely to fight it at every turn. Plus, even if it does pass, affected producers will likely drag out legal proceedings considerably. With that in mind, a resolution may be months away.
What It Means
All told, the future remains uncertain for tobacco stocks. Wall Street hates uncertainty. While there are no guarantees the ban will be carried out, confidence will be low among investors moving forward.
The prospective ban on menthol products poses significant consequences for the tobacco industry. External forces pushed up tobacco stocks today, but investors should not regard this as a promising sign for the entire sector.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
