(MONEY Magazine) – Four months ago, we reported that tobacco stocks faced some nasty problems. Those included an attempt by President Clinton to have tobacco declared a drug and restrict access to it by minors, and the fact that 10 states had announced plans to file claims against tobacco firms to recover billions in Medicaid costs for smoking-related diseases. Though the stock prices had fallen in response, the dozen analysts we talked to back then expected the shares of $66 billion Philip Morris, $16 billion RJR and $463 million Schweitzer-Mauduit to come back when the smoke cleared. But the smoke only thickens. Though Schweitzer, which makes the papers that cigarettes are rolled in, rose 19%, Philip Morris, maker of top-selling Marlboros, fell 9%. RJR Nabisco, known for its Camel brand, plunged 21%.

Tobacco's woes got worse on Aug. 9 when a Jacksonville jury ordered $4.2 billion Brown & Williamson, makers of Lucky Strike, to pay $750,000 in damages to Grady Carter, 66, and his wife. The jury found the company responsible for Carter's lung cancer since company documents proved it knew nicotine was addictive. After the verdict was announced, the tobacco industry's total market capitalization fell by $15 billion, or 13%. Two weeks later, President Clinton made nicotine a drug and placed the tobacco industry under the jurisdiction of the Food and Drug Administration. He also approved new FDA rules that require retailers to sell smokes only to adults and restrict advertising aimed at teens. The Centers for Disease Control and Prevention estimate that 3,000 kids pick up the smoking habit every day. Restricting sales to minors could cost the industry more than $1.4 billion each year.

Even Wall Street is discouraged. Analysts there say, for example, that Philip Morris' food and international tobacco divisions justify a share price of about $85. So with the company's stock trading at $90, the market was putting very little value on the firm's U.S. tobacco group, which generated operating profits of $3.74 billion in 1995. Gary Black at Sanford C. Bernstein calculates that damages against the companies could total $25 billion in today's dollars. Philip Morris' share alone would be $10 billion. "The companies' share prices will remain depressed at least until the next big trial," says Black.

So what should you do? Replace any tobacco stocks you own with other high-dividend payers before your losses mount. Diana Temple, a tobacco analyst at Salomon Bros., admits: "These shares can fall as much as 15% after some bad news hits."

--Amanda Walmac