Of course, in some nations, smoking is actually on the rise. And in others, reduced-risk products have slowed or even reversed declines for tobacco companies. “It is too early to say if this will fully rescue the industry long term,” Spielman notes. “It also makes the public health story more complicated.”

All this may sound like bad news for tobacco stocks, but Spielman argues that in fact the shares look undervalued now, with valuations seeming in many cases to reflect a worst-case scenario in which the entire business disappears in less than 30 years. Yet in reality, varying trends around the world and the rise of reduced-risk products offer some insulation.

That leads him to reiterate Philip Morris (ticker: PM) as his top pick, with a Buy rating and $110 price target. He writes that the company “increasingly is making the weather in the nicotine industry,” with reduced-risk products accounting for just under a quarter of dollar-based sales in 2020 and growing. Spielman writes that the company’s digital engagement—which its chief financial officer discussed with Barron’s last month—is effective, allowing its heat-not-burn product, IQOS, to quickly gain share in new markets.

By contrast, he downgraded Altria (MO) to Neutral from Buy, with a $46 price target. He writes that the company “comes out worst” from his research, as 82% of its exposure is to the U.S. cigarette market, which could conceivably disappear in three decades if patterns hold.

Altria has its own reduced-risk portfolio, but Spielman warns that the company’s market share in this category is as much as 20% below its market share in traditional tobacco. That means that as alternative products take more of the market, Altria will lose share.

Philip Morris is up 0.3%, at $87.95, in recent trading; the shares are up 6.2% year to date. Altria is down 0.6%, at $49.53, although it has risen 21% in 2021. The S&P 500 is up 0.2% in recent trading.

Write to Teresa Rivas at teresa.rivas@barrons.com