Market Spotlight: No relief from tobacco stocks

Stocks of cigarette makers were long thought of as recession safe havens. But they haven't provided much safety in this current economic slowdown.

Shares of three of the four largest U.S. cigarette makers have declined more sharply than the S&P 500 index since the start of the year. While the benchmark index has fallen nearly 6 percent, Altria Group Inc., the largest U.S. cigarette maker, slipped 14 percent, Reynolds American dropped 18 percent, and Loews Carolina Group fell 23 percent.

Conventional wisdom is that smokers are unlikely to cut back on their habit even in an economic slowdown. But analysts point to bans on smoking in restaurants, bars and other public places that have been enacted since the last recession.

Standard & Poor's last week said volumes of U.S. cigarette shipments this year should fall 3.5 percent, compared with a prior estimate of 2.7 percent. S&P believes shipment numbers will continue falling as a result of the smoking bans and higher cigarette prices. If Congress hikes the federal excise tax to $1 a pack, shipments could drop even further.

Investors may be able to escape the risk of higher taxes by betting on makers who cater to international markets. JPMorgan analyst Erik Bloomquist recently called Philip Morris International Inc., which was spun off from Altria earlier last month, his "favorite U.S. listed stock," due to its focus on emerging markets.

Goldman Sachs analyst Judy Hong expects Philip Morris International, which posted better-than-expected results for the first quarter, to continue beating expectations, saying its "full-year guidance looks a bit conservative even considering the expected step up in brand investment and the timing of cost increases in the remainder of the year."

Overall, Hong expects the profit decline that some cigarette makers experienced in the first quarter to be temporary, as she sees profit trends improving as the year progresses.