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Sam Stovall's Sector Watch January 29, 2008, 6:00PM EST

Tobacco Stocks: A Classic Defensive Play

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Relative Strength—S&P 1500 Tobacco Index

Despite S&P's expectation for a 2% to 3% decline in domestic consumption for the next two to three years, Kwon believes industry operating profits will rise modestly, as cost-saving efforts and merger synergies offset larger investment in focus brands. For the longer term she sees domestic cigarette consumption falling 1% to 2% a year.

So there you have it. From fundamental and momentum perspectives, S&P believes this subindustry index should continue to see strong price performances in the period ahead.

S&P's top pick in the subindustry is Altria Group (MO; $75.23). On Jan. 30 Kwon looks for the company's board to announce the timing for its planned spin-off of Philip Morris International, which she believes will be a catalyst for unlocking value in the stock. Kwon thinks an independent international unit, freed of U.S. regulatory and litigation constraints, will be able to accelerate growth. She has a 5 STARS (strong buy) ranking on the stock, and maintains an $85 price target.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of subindustries in the S&P 1500), along with a stock with the highest S&P STARS (tie goes to the highest market value).

Subindustry Company (Ticker) S&P STARS Rank Price (1/25/08)

Agricultural Products Archer-Daniels-Midland (ADM) 2 $42

Coal & Consumable Fuels Peabody Energy (BTU) 3 $56

Commodity Chemicals Georgia Gulf (GGC) 3 $6

Construction & Engineering Fluor (FLR) 4 $121

Construction & Farm Machinery Cummins (CMI) 4 $49

Diversified Metals & Mining Freeport-McMoRan Copper (FCX) 3 $84

Education Services Career Education (CECO) 5 $19

Fertilizers & Agr. Chem. Monsanto (MON) 3 $108

Health Care Services LabCorp (LH) 5 $74

Industrial Gases Air Products (APD) 3 $89

Internet Retail Amazon.com (AMZN) 2 $78

Oil & Gas Drilling Noble (NE) 5 $45

Oil & Gas Equip. & Svcs. Baker Hughes (BHI) 5 $72

Oil & Gas E&P Swift Energy (SFY) 5 $41

Source: Standard & Poor's Equity Research

Stovall is chief investment strategist for Standard & Poor's Equity Research Services .

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure

Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.

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