E-Cigarettes Are Smoking the Competition

NEW YORK (TheStreet) -- Part 1 of 4

Electronic cigarettes, commonly called e-cigarettes, are becoming more and more common. From relative obscurity five years ago, e-cigarettes have grown to $500 million in sales in 2012, and over $1.5 billion in 2013. The growth in the market is expected to continue, with e-cigarettes sales expected to top traditional cigarettes sales within the next decade.

How can investors profit from this trend?

There are a number of ways to take advantage of the growth in the e-cigarette market. Investors who seek exposure to e-cigarettes can buy into the larger tobacco companies. They are now entering the market, following on the heels of smaller start-ups. Lorillard (LO) ($48.00 at market close on Friday, Feb. 14), Altria (MO) ($35.57 at last close) and Reynolds American (RAI) ($48.21 at last close) are all major cigarette companies. But for now, e-cigarettes are a very small portion of their overall revenues. Smaller companies such as Vapor (VPCO:OTC, $5.78 at market close on Friday, Feb. 14), Victory Electronic Cigarettes (ECIG:OTC, $13.50 at last close) and mCig (MCIG:OTC BB, 33 cents at last close) offer pure play access to e-cigarettes. In addition, mCig offers access to investing in the legalization of marijuana -- though it is also a penny stock, and inherently very risky. What Are E-Cigarettes? An e-cigarette is a battery-operated alternative nicotine delivery system. E-cigarettes have a replaceable inhaler cartridge containing vegetable glycerin and/or polyethylene glycol, flavoring and nicotine. With every inhalation, a sensor triggers a "vaporizer" to heat a small amount of liquid flavoring. The liquid turns to vapor and is drawn into the user's mouth and then lungs. The vaping technology of e-cigarettes does not burn anything. The liquid mixture is simply vaporized. The vapor does not contain the harmful additives found in true smoke from hookahs or cigarettes. The replaceable cartridges come with different nicotine levels. Each is equivalent to 2 packs of cigarettes. HowStuffWorks has created a visual on the anatomy of an e-cigarette.

Stock quotes in this article: ECIG, LO, MCIG, MO, RAI, VPCO 

Market Size

Electronic cigarettes' sales are growing wildly, from almost nothing five years ago to roughly $500 million in 2012 and over $1.5 billion in 2013. E-cigarettes are now for sale at the 75% of tobacco retailers that carry at least one e-cigarette brand.

The growth in the market is expected to continue. Wells Fargo and Bloomberg estimate that e-cigarette sales will surpass traditional cigarettes within the next decade. The U.S. tobacco industry is a $90 billion industry. The most optimistic scenario puts the U.S. e-cigarette market at over $80 billion in 10 years, representing a 47% compound annual growth rate and a global opportunity for $300 billion in 10 years. Even more conservative estimates are rosy. Assuming no-growth in the overall tobacco market size and 50% cannibalization of tobacco cigarettes sales, e-cigarette sales could reach $45 billion in 10 years, representing almost 40% growth per year. Using a more conservative estimate that e-cigs would take 25% of total traditional cigarette sales, the e-cigarette industry could reach $20 billion over the next decade, or a compound annual growth rate of over 30% per year for the next decade. Part 2 of this 4-part article on e-cigarettes will arrive at TheStreet tomorrow. Stay tuned.

At the time of publication, the author held no positions in any of the stocks mentioned. Follow @hashapi This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Stock quotes in this article: ECIG, LO, MCIG, MO, RAI, VPCO  Harris Shapiro, the founder of TFST Publishing LLC., the publisher of The Focused Stock Trader, and is a contributor to TheStreet. He has been a stock broker, investment banker, and CEO of 2 micro-cap companies. His newsletter ended 2013 with 85 profitable trades out of 95 recommendations, for an annualized return of 265%. The service combines fundamental analysis, technical analysis and focus on the industry groups that are in the spotlight among investors. Shapiro has been involved in the small-cap market for 50 years. He currently covers such diverse industries as Robotics, 3D Printing, Solar Energy, Wearable Computing and similar categories that most services do not cover till the Public Companies become mid-cap stocks or larger.