Motley Fool: Tobacco industry changes may not bode well for investors

Increasing regulation is aimed straight at big tobacco companies, and not just in the United States.

Australia’s government recently introduced a bill that would prevent tobacco companies from displaying their brand logos and colors on tobacco packaging. The bill would allow cigarettes to be sold only in plain green boxes with graphic health warnings taking up 75 percent of the package. The new rules would go into effect in May next year. According to the AP, the bill is likely to pass.

Tobacco giants have promised a big fight and are arguing that the move diminishes the value of their trademarks.

Similar rules are going into effect in the United States, with new graphic warnings to soon appear on packages. The European Union is also considering comparable measures. More than 1 billion people across 19 countries now are subject to laws requiring graphic tobacco labels.

The industry has increasingly moved into oral smokeless tobacco as a more socially acceptable form of tobacco use. That holds some promise, as workplace rules against smoking continue to proliferate. However, those smoking alternatives make up just a small percentage of the biggest names’ revenue. Some of the largest players have even moved into the curious direction of offering smoking-cessation aids.

Tobacco investors, beware of these coming changes and the threats to profitability that they pose.

Ask the Fool

Q: I see that Zillow shares surged 79 percent when they debuted recently. Did I miss the boat on that, or can I still profit? – J.S., Atlanta

A: Zillow’s initial public offering (IPO) followed a common pattern, one that reminds us why it’s often best to steer clear of IPOs. Those who enjoyed the huge profit were mainly the privileged few who received the first shares, priced at $20 apiece, before they began trading. Because when the market opened, the shares commenced trading near $60, giving those folks a huge initial windfall.

During the rest of the day, though, the shares settled down, closing near $36. A few days later, they were at $28. Initial public offerings can be very volatile, and excited investors frequently end up grabbing inflated shares that will deflate in short order.

Remember, too, that many IPO companies are young and unproven. Zillow, for example, while promising as an online real estate marketplace, has been reporting net losses recently. It’s often best to give new shares many months or a year to settle down. A study by University of Pennsylvania economist Yochana Shachmurove of the 2,895 venture capital-backed IPOs from 1968 to 1998 revealed that these companies delivered an average annualized return of negative 45 percent.

Q: What are buy-side and sell-side analysts? – T.B., Tucson

A: Buy-side analysts work in-house for institutions such as mutual funds and pension funds, studying possible investments and recommending which securities the institutions should buy or sell. Sell-side analysts traditionally work for brokerages, trying to sell their ideas to institutions. If an institution likes a brokerage’s research, it might do business with that brokerage.

Many brokerages offer sell-side analysts’ research reports on various companies. Learn more at www.broker.fool.com.

My dumbest investment

After the Vietnam War, while in college, I bought some shares of a company I worked for, at $15. After college, I became a stockbroker and watched the stock go all the way to about $60, then all the way to about $2.

The great lesson for the idiot in me was to take some money off the table when I get a hefty profit.

My rule of thumb since has been to sell half of a holding after it doubles. This has meant I miss some upside, but it protects my original invested dollars. – R.E.F., Simpsonville, S.C.

The Fool responds: It’s hard to argue with that kind of policy: You end up with all your original investment back, and you still have an equal sum invested in the good performer. It’s also smart to be flexible, as some terrific companies will double and double over the years, and it would be a shame to take out too much, too soon.