British American Tobacco (BATS): A Stock With 20% Upside

British American Tobacco: Another Leg Up                                  

  • CEO expects “good performance” for entire FY, with revenue growth in line with 3-5% forecast (July 12)
  • Regulatory threat to business remains a threat; e-cigarattes a growing but competitive market
  • Major downward trend has paused; scope for a 20% rebound

British American Tobacco has been a ‘growth’ stock for years and years. Investors were enthusiastic about its strong cash flow – which led to good dividends – and stable business prospects. BATS, in sum, is an excellent defensive selection. (see BATS’ long-term chart below).

But this view changed drastically in 2017. BATS’ ascent checked completely; a major slide ensued. Perhaps it was the rise in ESG investing (abandoning ‘sin stocks’); perhaps it was the regulatory threat of e-cigarattes. Perhaps growth in the cigarette markets was over-optimistic.

But after a two-year, 57% correction from peak to bottom, we could be looking at a counter-trend upmove.

Pessimists may point to the fact that BATS dropped 10% after its recent results (July 12). A warning sign that BATS is still unwell.

True, but note that prices held steady at £27. Apparently, there are some investor accumulation at this level. Moreover, the stock established another higher low at £29 soon after – and a bullish breakout at £30 (see below). This is a clear technical sign that BATS is ready for the second upwave from £24.

There is no obvious selling point until £36, about 16-18% above current price levels.  With a dividend yield north of 6%, investors are paid a good chunky yield to hold the shares.

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