US - Take up fags for the new year

It's the season for New Year's resolutions, says Adam Lashinsky in Fortune. Hordes of us will have pledged to cut out beer and cigarettes. But, let's face it, our good intentions won't last: "classic vices never really go out of style". So scooping up stocks that benefit from smoking and drinking looks a safe bet, especially since these businesses tend to "throw off a whole lot of cash". Indeed, it seems a particularly sensible strategy for 2004: with valuations having already achieved lift-off, and uncertainty over the economic outlook once stimulus programmes wear off, "investors could use some sure things". The following companies are therefore worth a look.

Altria's (MO) "most infamous assets" are tobacco company Philip Morris's American and international businesses, but it also controls 36% of beer group SABMiller and 84% of Kraft Foods. "What's yummy about Altria is that it's cheap." The shares are on a 2004 p/e of 11 and trade at $10-$30 below most estimates of its break-up value. Altria intends to sell off some of its divisions once the tobacco industry clears up three major remaining lawsuits. Analysts with an eye on the tobacco litigation front, where momentum seems to be swinging in the industry's favour - a court recently reversed a $145bn judgement against it - think Altria could begin this process in about 18 months. David Adelman of Morgan Stanley foresees an eventual post-break-up value for Altria of $81 a share (the current price is $53) and notes that the market is ignoring the value of Philip Morris's US business. That only makes sense if litigation forces it to go bankrupt - hardly likely given cash-strapped states' dependence on the industry's annual $22bn payments - which will only continue if tobacco firms remain "commercially viable". Throw in a "relatively safe and rising" dividend, which translates into a yield just below 5%, and probable "massive stock buybacks", and Altria "could continue smoking for years".

l Meanwhile, "a good way to play the bottle" is to buy some shares in Constellation Brands (STZ), the world's largest wine company with brands ranging from Almaden Bag-in-the-Box at the low end and Australia's Hardy, along with several Napa Valley wineries, at the high end. It also distributes "tasty" beer imports, including Corona Extra and Tsingtao. A series of "smart" recent acquisitions should help boost earnings by 20% in 2004, and Constellation should also benefit from the "trend among fancier Americans to drink more wine". Constellation, which has grown cash flow per share by an annual average of 23% over the past five years, is among the cheapest stocks in its sector on a 2004 p/e of around 14.

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