I was running several magic formula screens today and noticed quite a number of tobacco companies appearing, specifically the larger tobacco companies. Historically, tobacco companies have been companies that post high Return on Capital numbers. For example, ValueLine reports Altria (MO) has posted Return on Capital numbers greater than 23% for the past 10 years. Nevertheless, whenever a whole industry appears in droves on the magic formula kitchen, it may be time to take a closer look.

Magic Formula Tobacco Companies

Lorillard Inc. (LO)- Earnings Yield= 16% Return on Capital =118%

British American Tobacco plc (BTI)= Earnings Yield= 8.05% Return On Capital = 84%

Reynolds American Inc (RAI)= Earnings Yield= 14% Return On Capital = 103%

Altria (MO)= Earnings Yield= 11% Return On Capital = 46%

Quick Analysis

From an investment perspective, Lorillard and Reynolds American stand out due to the higher earnings yield. Lorillard appears on the top 30 / 50 million screen which is significant due to the fact that it ranks higher than smaller cap stocks despite it being a small cap screen. But, the problem with it is that it generates it's revenues from its Newport brand. Reynolds American on the hand, laggs in efficiency ratios when compares to the other tobacco stocks.

Guru Positions With the Above Mentioned Tobacco Companies

1 Guru Increased Positions in LO: George Soros owns 74,055 shares as of 03/31/2010, an increase of 114.93% from the previous quarter. This position accounts for 0.08% of the $6.73 billion portfolio of Soros Fund Management LLC.

Reynolds American Inc. is owned by 4 Gurus. 1 Guru Initiated Positions in RAI: David Dreman bought 7,706 shares in the quarter that ended on 03/31/2010, which is 0.01% of the $4.24 billion portfolio of Dreman Value Management.

3 Gurus Kept Positions in RAI Unchanged or Slightly Adjusted:

David Winters owns 659,657 shares as of 03/31/2010, which accounts for 6.72% of the $530 million portfolio of Wintergreen Advisors.

Richard Aster Jr owns 7,405 shares as of 03/31/2010, which accounts for 0.02% of the $2.43 billion portfolio of Meridian Fund.

James Barrow owns 1,159,720 shares as of 03/31/2010, which accounts for 0.13% of the $46.38 billion portfolio of Barrow, Hanley, Mewhinney & Strauss.

1 Guru Increased Positions in MO: Kenneth Fisher owns 18,975 shares as of 03/31/2010, an increase of 20.49% from the previous quarter. This position accounts for less than 0.01% of the $33.01 billion portfolio of Fisher Asset Management, LLC.

8 Gurus Kept Positions in MO Unchanged or Slightly Adjusted:

Tom Gayner owns 116,700 shares as of 03/31/2010, which accounts for 0.15% of the $1.62 billion portfolio of Markel Gayner Asset Management Corp.

Dodge & Cox owns 31,626 shares as of 03/31/2010, which accounts for less than 0.01% of the $84.7 billion portfolio of Dodge & Cox.

Ruane Cunniff owns 97,342 shares as of 03/31/2010, which accounts for 0.03% of the $7.85 billion portfolio of Ruane & Cunniff & Goldfarb Inc.

James Barrow owns 23,495,804 shares as of 03/31/2010, which accounts for 1.04% of the $46.38 billion portfolio of Barrow, Hanley, Mewhinney & Strauss.

Donald Yacktman owns 53,501 shares as of 03/31/2010, which accounts for 0.03% of the $3.26 billion portfolio of Yacktman Asset Management Co..

David Dreman owns 2,224,056 shares as of 03/31/2010, which accounts for 1.08% of the $4.24 billion portfolio of Dreman Value Management.

Tweedy Browne owns 430,875 shares as of 03/31/2010, which accounts for 0.34% of the $2.62 billion portfolio of Tweedy Browne CO LLC.

Jean-Marie Eveillard owns 61,000 shares as of 03/31/2010, which accounts for 0.01% of the $12.96 billion portfolio of First Eagle Investment Management, LLC.

1 Guru Sold Out MO: George Soros sold out his holdings in the quarter that ended on 03/31/2010.

What Worked in the Stock Market for Long-Term Investors?

Extensive research has found that the companies with predictable revenues and earnings outperform the market average; they also suffer lower probability of loss. As a matter of fact, this kind of companies are exactly what Warren Buffett wants to buy and hold forever. Please read the research about what worked in the stock market:

Part I: What worked in the market from 1998-2008? Part I: Predictability Rank
Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety

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