Can These Stocks Bounce Back?

However hard the market slams a stock, there's always the chance it'll come bouncing right back. We'll consult our Motley Fool CAPS community to find shares on the rebound, examining one specific sector of the economy in search of companies with rising CAPS ratings.          

There are just eight stocks listed under tobacco in the CAPS' screener, but half of them are well respected wit four- and five-star ratings. Those accolades mean our 165,000 CAPS members are confident that these stocks will beat the market in the months ahead, but let's see what members are saying about the ones below:

Source: Motley Fool CAPS; Yahoo! Finance.

Until the market hit the panic button, the broad market averages had staged a pretty bold recovery -- but it's still up 18% over the past year. Tobacco stocks, on the other hand, haven't done nearly as well, with average returns essentially flat from the year ago period. Of course, those returns were hurt by Star Scientific plunging 76% and tobacco leaf trader Alliance One International (NYSE: AOI) falling 6%, while other stocks provided modest to sometimes great returns. And that doesn't count the dividends such cash-gushing companies spin off, either.

So let's take a closer look at why investors think that some of these other companies won't be jumping from the frying pan into the fire now that the market has fallen from its lofty heights.

Some spring in its step
When Congress approved the FDA to regulate the tobacco industry last year, it was just another step toward the government eventually banning cigarettes altogether. Although the law prohibits the FDA from doing that -- yet -- it looks like the FDA is relishing the chance to make life difficult for tobacco companies.

"This is an opportunity for me to serve my country by preventing its men, women and children from suffering and dying from tobacco-related diseases," says Dr. Lawrence Deyton, director of the FDA's Center for Tobacco Products.

Altria, Reynolds American (NYSE: RAI), and Lorillard (NYSE: LO) face an increasingly hostile operating environment, and it's little wonder that Alliance One International and other leaf merchants have seen slower sales. Cigarette makers are reducing domestic leaf purchases as cigarette volumes shrink in the wake of increased taxes and regulation. Alliance saw revenue drop 4.6% due to a 13% decline in quantity sold last quarter.

As the regulatory machine cranks up into overdrive, investors might be cautious about Altria's growth prospects, but they'll miss out on a potentially powerful profit center. The U.S. tobacco king pays a healthy dividend yielding 6.7% and it's invested in smokeless tobacco products where it still has some pricing ability. It recently moved to raise prices by $0.10 a can.

CAPS member The1stLectroMan sees Altria's diversification away from its primary cigarette business as a key to its future.

Altria group is a holding Co. and they are positioning themselves to follow the market in both tobacco and smokless products. Further they have recently aquired some holdings in the winery bussiness.

Vector Group (NYSE: VGR) also pays a big dividend (yielding more than 10%), but based on its free cash flow payout yield, the dividend might actually be in danger of blowing up.

International markets are smokin'
With the regulatory risk in the U.S. and high growth abroad, Altria's spinoff of Phillip Morris International was a brilliant move. But now Great Britain seems intent on following the U.S.'s lead, but with a new move. As part of its own health care reform, Britain wants to ban retailers from displaying any and all tobacco products.

Apparently the mere viewing of a cigarette pack will induce uncontrollable urges to buy one, but if it goes into effect, British American Tobacco expects to feel the impact. The company has a presence internationally as well as here in the U.S., with brands like Lucky Strike and Kool, which are marketed in the U.S. by Reynolds.

CAPS member jigar34 says you don't have to be a smoker to realize that BAT is a great investment.

Just initiated position in real life portfolio...I also own PM. I don't smoke but I love the business: rather inelastic, great pricing power, cashflow, growth potential around the world as people in developing countries have more disposable income for premium smokes, well run company, been around forever and raising dividends at a high rate. In the last 50 yrs MO has returned over 20% annually....I am hoping PM and BTI can provide similar or better results for my portfolio.

The ball's in your court
There are many factors that go into whether a stock is a buy or sell, so it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. Head over to CAPS today and share your thoughts with other investor analysts on whether you think these stocks are ready to bound higher.