Tobacco Stock Set to Dip After Downgrade

MO short sellers have been cashing out

The shares of Altria Group Inc (NYSE:MO) aredown 2.4% in electronic trading, after Morgan Stanley downgraded the tobacco name to "underweight" from "equal-weight," while trimming its price target to $45 from $54. The analyst in coverage lowered their earnings growth forecast, and warned that Altria's business algorithm is at risk from changing demographic trends and harsh Food and Drug Administration (FDA) regulations. Altria Group will report fourth-quarter earnings before the open on Jan. 31.

MO stock is set to open dangerously close to its Dec. 26 five-year low of $46.49. The shares bounced from that level to start off 2019, but were quickly stifled by the $50 level, an area that is also home to their descending 50-day moving average. For the past month, analysts have expressed their skepticism over Altria Group's recent JUUL investment.

The stock could be a victim of more bearish analyst attention in the near future. Currently, nine of 14 brokerages in coverage rate MO a "buy" or better, with only one "sell" on the books. Further, its consensus 12-month price target of $57.75 is a 20% premium to Friday's closing perch of $48.31.

Interestingly, short sellers have been heading for the exits. Short interest fell by 13% in the last two reporting periods to 53.87 million shares, the lowest amount since the April 15 reporting period. MO's inability to take advantage of this exodus of bearish bets only underscores its technical weakness.

In the options pits, calls seem to be preferred. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.76 sits in the 16th percentile of its annual range. The low percentile rank means that near-term option traders have rarely been more call-biased during the past year.