Food and Drug Administration (FDA) sets Big tobacco alight.
Last week’s announcement by the FDA caught most traders in “big tobacco” shares off guard with nowhere to run. This week I am going to give an update of the events and stress the importance of having a Stop loss on all your trades.
There are several factors that can and will affect the value of a business and investors should keep their eyes open to all the moving parts. Businesses are governed by sets of rules that are set at various levels within the industry, from municipal level to national level. The profitability of businesses and their viability will be affected by the business environment that is created by these arms of government. If these arms of government change regulations, the market will discount future cashflows on the back of new rules and regulations in the market.
Changes in regulation in key markets may have material effects on businesses the world over. The announcement by the Food and Drug Agency(FDA) last week Friday that they would like to see combustible tobacco products addictive levels being reduced to non-addictive levels, triggered a “fire sale” in tobacco producers that have a presence in the American market. This was a typical example of how investor sentiment changes, within minutes’ shares of “Big tobacco” were down anything from 2-5% in the US. The local listing of British American Tobacco (BTI) was down over 11% and was trading below 80000c per share having opened the day above 90000c per share. If the new changes are to be implemented, it is estimated that the business could lose significant revenue streams.
My trade idea titled British American Tobacco “lighting up”dated the 26th of July 2017, had recommended a buy on BTI. The rational of the trade was based on the trading range in which the stock had been in, and the areas in which it was finding technical support. A day before the proposed change in regulation, the share traded at the upper end of the range and pulled lower to close just above 90000c on the 27th of July. On the 28th of July after the announcement from the FDA our order triggered as per our trade idea and was stopped out within minutes of execution. Our stop loss minimised the loss on the trade, as predicted a break below the opening gap from April would have resulted in a move to 82500c and then 80000c.
So, what is the next move for the tobacco manufacturers? In my opinion, I felt that the shares of most of the cigarette manufacturers have been oversold in the short term. For long-term players, this could be an optimum time to deploy new money into the trade. For clients looking to buy BTI for short term moves, I would wait for the smoke to blow away as more carnage may be on the cards in the short term.
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26 July 2017 - Initial Technical Take Published
Stopped Out - 28 July 2017
[JSE:BTI] British American Tobacco
"Lighting Up" - Technical Take
Direction: Long (BUY)
Entry: 87600c
Stop: Loss: 85000c
Take Profit: 92000c
Volatility remains the only constant on the local market, providing fertile conditions for short term traders. This week I am going to look at a household name that has stood the test of time. BTI has been trading in a well-defined range since it broke higher in April of this year (as shown on the chart below). This mega cigarette producer has been on the acquisition trail and has finally completed the purchase of Reynolds in the USA, which will make it one of the largest cigarette producers in the USA. As depicted below the share has bounced off the support line at 88000c and has traded to as much as 92000c in the same move on numerous occasions. There is a support line from December 2016(the blue line), I anticipate the share will retest this line, aggressive buyers can enter half of their position here at 88600c. If this support breaks the share could test the bottom of the channel at 88000c, which would be the ideal entry point. I have placed a stop loss at 85000c the dotted red line, as there is an opening gap that could be filled on a move lower.
Source: Bloomberg 2017
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Wishing you profitable trading.
