We examined Altria (NYSE: MO) using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but a common interpretation is signal line crossover. Signal line crossover uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of Altria's MACD profile:


Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! While we jest, it's actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 26 times!

Here at Fool.com, we're more interested in other measures of company value. When we look at Altria and its peers, here are the areas that interest us:

Metric

Altria

British American Tobacco
(AMEX: BTI)

Reynolds American
(NYSE: RAI)

Market Cap (billions):

$46.47

$70.60

$16.72

Qtrly Rev Growth (YOY):

(5.50%)

7.60%

(0.20%)

Revenue (TTM, billions):

$16.71

$23.40

$8.48

Net Income (TTM, billions):

$3.45

$4.43

$ 1.22

P/E (TTM):

13.42

15.89

16.75

PEG (5-year expected):

1.77

1.92

1.93

Source: Yahoo! Finance and Capital IQ, a division of Standard and Poor's.
YOY = year over year. TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These are areas that led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best way for individual investors to build lasting wealth and achieve their financial goals.

So when you look at Altria, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • The giant of American tobacco, Altria makes its trade in alcohol and varying cigarette, smokeless tobacco, and cigar products. For investors, buying into Altria is most likely a dividend play. Altria boasts a hefty 6.4% dividend yield. However, organic growth looks iffy. In its most recent quarter Altria reported a 5.5% year-over-year drop in revenue. The culprit is U.S. demand for cigarettes, where domestic U.S. cigarette volumes were off 10.2%. Altria is doing its best to capture the largest slice of a diminishing U.S. pie, but the long-term direction of U.S. cigarette consumption is headed downhill.
  • Aside from cigarettes, the company has other valuable assets. In 2008 Altria purchased UST for stronger exposure in the smokeless market. That move now looks pretty savvy, as smokeless tobacco saw a 9.2% volume increase last quarter. Also, in addition to its ownership of Ste. Michelle Wine Estates, Altria also owned a 27.3% piece of brewer SABMiller at the end of 2009. The diversification of "sin" activities should benefit Altria in the coming years as these segments have better growth opportunities.
  • The elephant in the room for Altria is potential litigation. While the company has recently received favorable rulings, the threat and uncertainty of legal proceedings will continue to weigh on Altria across the foreseeable future.

Want to buy Altria based on technical merits today? Technically, odds are that you should flip and sell Altria sometime very soon. If that sounds like madness to you, well, we here at Fool.com agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race to schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. It's tempting to skip the complexities of evaluating true company value, but that is ultimately the wrong path for individual investors.

Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market. However, with up to 75% of market trading now done by Ph. D-level programmers at massive high-frequency funds, even if opportunities existed, what chance does an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to studies. There was Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier. Altria crossed the crossover 26 times across the past year! The amount of trading in most technical analysis schemes eats away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's why, at Fool.com, we recommend individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. We find that to be the best contributor to long-term wealth, and it'll spare you having to sit bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then Altria looks like a buy right now. Just don't expect to hold it very long.

Jeremy Phillips owns shares of no companies listed above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.