The smoke is not yet clear on the settlement Brooke Group Ltd. reached on a class-action tobacco suit, but shareholders are selling the stocks of the other tobacco companies that would rather fight than settle.
Some believe the settlement, which is subject to federal court approval, could portend additional suits against other tobacco companies and end up costing them millions. Brooke and its Liggett Group tobacco subsidiary, however, would be released from all current and future addiction-based claims if the settlement is approved.
The price of Philip Morris Cos. Inc., New York, dropped almost $10 in two days after the announcement; RJR Nabisco Holdings Corp., New York, was down about $2.50 during the same period.
Clifford Mpare is one money manager who wasn't selling his holdings in Philip Morris. The director of investments at NCM Capital Management Group Inc., Durham, N.C., said the settlement won't change his firm's view of tobacco stocks or affect the stock price of larger tobacco company stocks in the long run.
NCM holds about 323,000 shares of Philip Morris.
Mr. Mpare said NCM purchases stocks based on valuation, and tobacco stocks "look good right now, with attractive p/e ratios. And (they) pay dividends."
The other tobacco companies would rather fight than settle the legal challenges, Mr. Mpare said. But he is concerned about the precedent set by Liggett.
"It could have a negative impact on the industry, but we don't believe it will have any impact for a period of time," he said, "But it probably won't affect the larger companies significantly."
Michelle Clayman, chief investment officer at New Amsterdam Partners, New York, said the Liggett settlement might cause her to re-evaluate whether to buy tobacco stocks in coming months.
New Amsterdam holds about 4,000 shares of Philip Morris in one account. Tobacco stocks have done well in recent months because the market discounted the liability risk, said Ms. Clayman.
But she said she has been "uncomfortable" with the tobacco risk at Philip Morris, although tobacco is one product of what is considered a well-diversified consumer products firm.
The Liggett settlement "has to affect valuations of these stocks," Ms. Clayman said, adding she is weighing the impact of the settlement on Philip Morris.
"What we need to do now is try to estimate what the impact of the settlement will be on the company," she said. "It is probably in the best interests of the larger tobacco companies to fight it all the way.
"But this certainly puts a damper on it."
Some consider the turmoil a buying opportunity, at least as far as Philip Morris stock is concerned.
"There's this huge litigation burden hanging over Philip Morris, and every time there's a little flare-up like this on the legal front it provides a buying opportunity," said Charlie Mayer, senior vice president and the portfolio manager for the $4.5 billion Industrial Income Fund of INVESCO Funds Group, Denver.
"Philip Morris could be trading at 20 times earnings if it weren't for its litigation threats, and it's only moving at 11 times earnings. The price is evening out....cooler heads are prevailing," he said.
Mr. Mayer holds about 1% of his portfolio, or about 460,000 shares, of Philip Morris in the mutual fund, and he said he does not intend to lighten the position. Mr. Mayer even bought a little more Philip Morris for another smaller account he manages, he said.
But he is holding the line on investment in other tobacco-related stocks.
"I like investing in the industry leader and only Philip Morris has the market leadership and cash flow to withstand this and future litigation flare-ups and still buy back stock and keep dividends up. RJR is saddled with so much debt, American Brands has exited the U.S. tobacco market completely, and the rest of the players are just too small. I'm not even looking at the others."
Bennett LeBow, chairman of Brooke Group and a major shareholder of RJR Nabisco, is proposing a slate of directors to replace existing board members at the RJR annual meeting next month. Mr. LeBow wants to separate RJR's tobacco operation from the rest of the company.
As part of the agreement, the plaintiffs also agreed not to stop a proposed spinoff of Nabisco to RJR Nabisco shareholders if Brooke's nominees are elected to the RJR Nabisco board of directors.
This story was written by Terry Williams with reports from Fred Williams and Christine Williamson.