Tobacco Stocks Hammered by FDA Nicotine Crackdown

Tobacco stocks got smoked after the FDA caught investors off guard by announcing a new initiative aimed at reducing tobacco-related disease and death in the U.S.

According to the FDA press release, the agency plans to reduce the nicotine content in cigarettes to non-addictive levels and take additional steps to protect children from the dangers of smoking.

“The overwhelming amount of death and disease attributable to tobacco is caused by addiction to cigarettes – the only legal consumer product that, when used as intended, will kill half of all long-term users,” FDA Commissioner Scott Gottlieb says in the news release.

Gottlieb says the FDA will consider legislation that will “render cigarettes minimally addictive.”

The FDA also will look into possible exemptions for premium cigars and delays in implementing new regulations on e-cigarettes and other smokeless products.

Shares of tobacco stocks Altria Group Inc. (NYSE: MO), British American Tobacco (BTI) and Vector Group Ltd. (VGR) finished Friday’s session down 9.6 percent, 7 percent and 4.6 percent, respectively.

Tobacco giant Philip Morris International (PM), which does not have a meaningful presence in the U.S. market, plummeted 7 percent before quickly rebounding to finish the day up 0.2 percent.

While investors are understandably concerned by the implications of tighter nicotine regulations, Wells Fargo analyst Bonnie Herzog says the FDA may simply be facilitating the inevitable transition from cigarettes to lower-risk products.

“We’ve longed believed the FDA would ultimately take a more comprehensive approach toward regulating nicotine was a natural next step,” Herzog wrote Friday. “Overall, while the market is viewing today’s announcement as a ‘negative’ for cigarette manufacturers, we believe this could prove to be an opportunity over the long term for reduced risk products and, therefore, a positive for Altria/PM as they have a unique competitive advantage.”

Mike van Dulken, head of research at Accendo Markets, says investors’ knee-jerk reaction on Friday was overly pessimistic.

“The fine print suggests…

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