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Looking Outside The S&P 500 For Value With 22nd Century Group

The WHO's recommendation for reduced nicotine cigarettes could benefit 22nd Century Group.

Via Katrina.Tuliao & strichpunkt

I am convinced that now is the time to be looking outside the S&P 500 for investment ideas. To be perfectly honest, I don’t understand how anyone could think otherwise.

The current bull market that started in March 2009 is now the second longest in the history of the S&P 500 index. We aren’t due for a bear market… we are significantly overdue.

When the bear comes, history suggests that it could be a pretty painful one. Feast your eyes on the table below that details what has happened at the end of all other S&P 500 bull markets that have lasted anywhere close to this long:

Top 7 Longest Bull Markets In History


# of Months

Percentage Gain

Subsequent Decline

1990 – 2000




1921 – 1929




Current March 09′ – May 17′




1949 – 1956




1982 – 1987




2002 – 2007




1932 – 1937




Average Bull Market Gain


Average Subsequent Bear Market Decline


Those are sobering numbers. We are likely looking at a full out collapse sooner rather than later.

My first thought is that building cash rather than buying equities is the way to go. My second thought is that if you are buying equities, you are going to want to look outside of the S&P 500, where valuations are inflated.

Screening For Insider Ownership, Net Cash and 2017 Catalyst

Here is my theory: When the market crashes, I want companies that are likely to outperform. Obviously, given what I’ve already said, I’m looking primarily outside the S&P 500 for such companies.

I believe that there are a few attributes that such companies are likely to have:

  • The first is a cash rich balance sheet, since more leveraged names always seem to perform worse in a risk-off market.
  • The second are companies with significant catalysts that could create positive stock price momentum no matter what the overall market is doing.
  • The third is an inexpensive valuation, since higher multiple stocks have much more room for valuation compression.
  • The fourth is strong insider ownership, because I find that is usually accompanied with a more loyal and less volatile shareholder base.

While screening for such attributes, 22nd Century Group (XXII) popped up on my radar screen. I’m not totally sold on the business, but I am interested in digging further.

Here is what I know:

22nd Century Group – The Business

22nd Century Group controls the intellectual property and makes cigarettes that have approximately 95% less nicotine than tobacco in cigarettes previously marketed as “light” cigarettes.

Via Kruscha

The appeal of this is that it is a less addictive cigarette. Where the potential of the company gets interesting is when you consider that the World Health Organization has said this:

Mandated reductions in nicotine to minimally addictive levels should be supported by comprehensive regulation of all nicotine- and tobacco-containing products.”

From what I have read, my understanding is that 22nd Century is the only company in the world capable of producing combustible tobacco cigarettes at this very low level of nicotine.

If (and it could be a big if) the WHO’s advice is followed at some point in time, the intellectual property that 22nd Century controls should be quite valuable.

22nd Century – The Balance Sheet

The balance sheet meets my criteria of net cash and no debt. That isn’t a permanent state though, as this company is burning cash and could need to raise capital at some point although not in the immediate future as far as I can tell.

22nd Century – The Catalyst

This year, 22nd Century will submit a Modified Risk Tobacco Application to the FDA for the “Brand A” VLN cigarette.

Approval of this application would give 22nd Century the right to actually state on its packaging and in advertising that its cigarettes reduce exposure to nicotine by 95 percent relative to conventional cigarettes.

I didn’t know that you would need approval for that if it is an actual fact, but apparently you do. Advertising of any kind around cigarettes is quite sensitive, I suppose. Didn’t cigarette companies actually advertise the health benefits of smoking once upon a time?

Approval of this application should be a significant event for the company since it can’t currently advertise this key fact.

22nd Century – The Insider Ownership

Insiders own 10.6% of the outstanding shares of the company. On top of that, the original founder of the company owns another 6.1% of the shares and is a strategic consultant. This ownership stake has insiders aligned with shareholders.

22nd Century – The Valuation

Here is where I hit a snag. I don’t know how to value this company.

The reason for that is that to value it, I need to make a prediction about whether or not the WHO’s recommendation to mandate reduced nicotine cigarettes is going to be implemented.

I have no ability to predict that. That leaves me with a valuation estimate of 22nd Century that lies somewhere between not much and a whole bunch. That puts this one in the speculative basket and outside what I would consider an investment.

22nd Century – Conclusion

The company ticks several of the boxes that I want to see ticked. Good balance sheet, a fairly significant upcoming catalyst and strong insider ownership. I believe the company also has very real potential. Countering these positive attributes is the fact that there is a huge amount of uncertainty about how this will play out and virtually no way to accurately value the business.

I believe this one is interesting for a speculation which means a very small amount of capital to be put at risk.

AT&T, T-Mobile and Verizon should be turning the volume up. Their current quiet murmur is just not enough.