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Will Imperial Tobacco thrive during risk adverse markets?

Market jitters provide defensive stocks with increased exposure, yet technical warning signs appear for Imperial Tobacco.

Cigarettes
Source: Bloomberg

Amid a wider market selloff, investors are looking for a more defensive play to help ride out somewhat unpredictable periods within the markets. Imperial Tobacco is one such company, providing exposure to a sector which is typically seen as weatherproof to larger risk-off moves in the market.

However, this defensive nature can typically mean that during the good times, other riskier investments will outperform, yet given the somewhat toppy nature of markets currently, there is a feeling that firms such as IMT will outstrip the index. This has been the case over recent months and is expected to continue being so while uncertainty dominates global sentiment.

Imperial Tobacco comprises of three segmented brand types; growth, specialist and portfolio. Out of the three, the most important, financially speaking, are retained within the growth portfolio, with names such as Davidoff, JPS and Lambert & Butler.

However, despite the association with tobacco products, it is actually the logistics side of the business which provides a greater revenue stream for the firm (£7.8 billion in 2014). Thus investors will be watching the upcoming earnings release to see if it can stem the slowdown in that sector of the business – -4.41% in 2014.

A 10% dividend expected for the forthcoming three years, accompanied by continued market volatility, means that many investors will be moving into firms like IMT in the near future.

From a technical perspective, this week has seen price move down to the 20-week simple moving average, which has provided a key support level on a number of occasions throughout 2015. Thus, we can use this indicator – currently £32.62 – as a good signal of market direction.

Looking at recent price action, we have seen a new low created at the beginning of July, accompanied by a failure to move back above £34.13 which means there are worries of a more protracted selloff in the offing. After all, the last time we saw the stock create a new low and lower high was back in December 2014.

In any case, given the long-term trend in place, I favour a move back towards the upside as long as price remains above the 20-week SMA. However, a close below this level would point towards a possible move back to £30.47. The upcoming earnings release will provide exactly the kind of stimulus needed to get this chart moving.

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