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In this Feb. 7, 2011, file photo a person smokes a Marlboro cigarette, a Phillip Morris product, in Hialeah, Fla. (Alan Diaz/AP)
In this Feb. 7, 2011, file photo a person smokes a Marlboro cigarette, a Phillip Morris product, in Hialeah, Fla. (Alan Diaz/AP)

Cigarette maker joins tech giants among most dominant U.S. stocks Add to ...

Big Technology better make room for Big Tobacco.

Such is the battle for S&P 500 leadership this year, where mega-cap technology has recently unseated the reflationary trade as the main driver behind the index’s 5.6-per-cent advance. But lost in the rotation is the stalwart of 2017, a company that sits up there with gains from Amazon.com Inc. and Facebook Inc., and peddles in e-cigarettes over e-commerce.

Philip Morris International Inc., the world’s largest publicly traded tobacco company, emerged as the first quarter’s unsung hero. Its 3.3-per-cent contribution to S&P 500 gains makes it the fourth most important U.S. stock, right after shares that look more familiar to the leader board: Apple Inc., Amazon and Facebook.

Philip Morris’s gains alongside Facebook comes as the cigarette maker moves to become more like a tech company itself. The New York-based tobacco giant says it’s shying away from combustible cigarettes in the hopes of creating a smokeless future. Its performance over the past two months show investors are keen on the plan, even though it could disturb a steady business with consistently paid dividends.

Shares of Philip Morris have advanced 23 per cent in 2017, and are currently trading about 1 per cent under an all-time high of $114.65 set March 21.

“Both the business and the stock clearly have momentum behind them,” said Philip Gorham, an analyst at Morningstar Inc. “People are waking up to what a game-changer their heated tobacco product could be.”

Questions over President Donald Trump’s ability to enact tax cuts at a time of heightened valuations caused equities to lose steam over the past month. Yet computer and software makers -- industries less susceptible to tax reform and rate changes -- returned as market leaders following their brief hiatus after the U.S. election. Active managers followed suit by taking bullish positions.

In many ways, Philip Morris behaves a lot like those beloved tech stocks. Both the Nasdaq 100 and tobacco stocks are trading at record low realized volatility, data from Bloomberg show. At 27 per cent, the cigarette-marker’s effective tax rate is within one percentage point of Apple. Its international reach also makes shares less susceptible to gyrations in the domestic economy.

Though it may resemble a technology company, mutual-fund managers aren’t treating Philip Morris as such as shares stretch to lofty valuations. Although 31 per cent of mutual funds analyzed by Bank of America Corp. hold Philip Morris, it misses the cut for the top five of most loved consumer staples stocks, according to research from the bank.

“Managers increased their exposure in tech again this month, bringing its relative weight to the second-highest level in our data history,” Savita Subramanian, chief U.S. equity strategist at Bank of America Corp., wrote in a report last week. “In contrast, staples and utilities are currently at record underweights.”

Philip Morris has spent more than $3-billion coming up with a portfolio of products it says are less harmful for consumers than cigarettes. That would mean trading out low-tech Marlboros for new innovation. Its biggest bet so far is a heat-not-burn gadget called IQOS.

Though it’s not alone in its quest for a better-for-you tobacco product, Philip Morris is ahead of the game with the Food and Drug Administration. It’s submitted two applications with the federal agency -- one to get a modified-risk designation, and the other to get the product on the shelves with or without a less-risk label. That means that IQOS could be sold in the U.S. within the next year.

“It is very early days but the success of their reduced risk products in overseas markets -- particularly Japan -- has been better than expected,” said Jack Russo, an analyst at Edward Jones. “So far the news has been positive.”

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Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”

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