over 2 years ago • 3 mins
British American Tobacco (BAT) announced an upbeat forecast for the rest of the year on Tuesday, and investors were left breathless.
What does this mean?
If you think you’ve been seeing more longboard-riding startup execs leaving trails of vape smoke in their wake, you’re not imagining it: BAT added a record 1.4 million new customers of its “non-burning products” last quarter, bringing the total to 15 million. And of all its brands, Vuse has been the standout: the vaping mainstay now boasts a market share of more than 30% in five of the world’s biggest vaping markets.
The upbeat results encouraged BAT to bump up its sales growth forecast for the rest of the year, but it left its profit forecast where it was. That might be because the company’s investing heavily in its non-burning products business in an effort to grow sales, and it’s admitted that the segment won’t become profitable till 2025.
Why should I care?
The bigger picture: Smoking’s not cool anymore.
Tobacco stocks have been feeling the heat lately, partly because traditional cigarette businesses – which still make up the bulk of their sales – are increasingly at risk of tighter regulation. And it’s true that smoking rates have been falling around the world, with cigarette sales expected to fall by 3% this year. Not everywhere, mind you: Pakistan, Bangladesh, and Vietnam all have flimsier anti-smoking rules, which might be why BAT singled them out on Tuesday as key areas for growth.
For markets: Nice-to-haves are out, must-haves are in.
Then again, one investment research group thinks now might actually be the perfect time to buy tobacco stocks. See, the economic recovery is transitioning from “early-cycle” to “mid-cycle”. That’s when growth rates start to peak, and when consumer staples stocks – like tobacco – should outperform consumer discretionary stocks, like fashion. That’s down to their more stable earnings potential, and – as an added bonus – how much cheaper they’re currently looking.
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Investors have been keeping active this year: fresh data from Bank of America on Tuesday showed May saw particularly historic levels of outperformance at “actively managed” funds.
What does this mean?
Active fund managers research and invest in individual stocks they think will shine, rather than “passively” tracking the performance of an index. That approach paid off last month: 70% of active funds focused on large US stocks outperformed the wider market – one of the highest percentages in recent history. A similarly strong showing in February means more than 60% of these funds are currently beating the market in 2021 so far.
That impressive outperformance is partly due to sluggish price rises among market-dominating tech stocks: actively managed funds typically invest more in the smaller shares that have received an outsized boost from progress on coronavirus vaccination. They also tend to prefer cheap-looking “value” stocks over “growth” stocks, which have fallen in investors’ favor this year.
Why should I care?
The bigger picture: It’ll never last.
Beating benchmarks is a big deal for most active managers: that’s how they justify fat fees from investors who could instead just passively track an index’s performance via a cheap exchange-traded fund (ETF). But investors don’t seem convinced active funds will be able to keep it up – especially since a record $305 billion has flowed into US stock ETFs in 2021 so far, compared to $250 billion in the whole of 2020.
Zooming out: Activists matter.
An activist fund is both actively managed and aggressive in seeking change at the companies it invests in. Europe’s biggest activist investor, Cevian Capital, announced on Tuesday that it’d built a 5% stake at Aviva, and that it was pushing the British insurance giant to cut costs and distribute an additional $7 billion to shareholders – who promptly sent the stock’s price up 3%.
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