Yesterday I wrote about eCigarettes, a relatively new innovation in the relatively ancient tobacco industry.
According to Reuters, the eCigarette industry grew at a rate of 115% per year from 2009 to 2012. That kind of growth is unheard of in the tobacco industry. In fact the rest of the tobacco industry is actually in a decline.
Should you invest in eCigarettes?
Yesterday I also wrote about the only real “pure play” eCigarette investment out there, Vapor Corp (Nasdaq: VPCO). Despite being a “pure play” on eCigarettes there are compelling reasons to avoid this stock.
While I don’t like Vapor Corp I do believe in the general eCigarette growth thesis.
Experts predict that the market for eCigarettes will surpass that of traditional tobacco cigarettes by 2024.
Smoking bans and public health initiatives aren’t limited to the United States. Smoking is now recognized as a major public health risk all around the globe. And without the carcinogens and harmful chemicals of tobacco cigarettes, eCigarettes are seen as a much healthier option.
Perhaps “less-unhealthy” is a better term. But the point is that eCigarettes are the logical response to increasing regulation and stigma for those who do not wish to give up or can’t beat their nicotine addiction.
Despite being controversial, tobacco investments have repeatedly outperformed the market. The chart below shows how tobacco giant Reynolds American (NYSE: RAI) has outperformed the S&P 500 over the past five years.
Not only has Reynolds American returned 213% while the S&P has returned 114%, the company also consistently pays a much higher dividend than the average S&P 500 company.
Reynolds American’s dividend is currently 4.45%. The S&P 500’s average dividend is 1.83%.
That extra yield – paid out in cash or reinvested in additional shares and compounded – makes a big difference over time.
What does Reynolds American, one of the world’s largest tobacco companies, have to do with eCigarettes?
Big tobacco companies are the eCigarette companies. With each of the major tobacco companies controlling one or more eCigarette brands, there is very little room left for the independent eCigarette companies.
Lorillard (NYSE: LO) was the first big tobacco company to enter the and it did so by purchasing Blu eCigs in 2012. Altria (NYSE: MO) entered the market in the beginning of this year with its purchase of Green Smoke. Reynolds American entered the market last with its own eCigarette brand, Vuse.
Unlike the vast majority of eCigarettes, Vuse is made in the US instead of China. It also seems to be quickly stealing market share from Blu, Green Smoke and privately held NJOY.
The decades-old distribution networks established by the big tobacco companies create a huge disadvantage for independent eCigarette brands. So much of a disadvantage that I recommend you steer clear of any independent brand that hasn’t already established a distribution foothold or a strong direct-to-consumer sales model.
NJOY seems to be doing well with its distribution but, as a privately held company, isn’t an option for most investors.
The Bottom Line
The short answer is yes, you should invest in eCigarettes – but only if you’re already comfortable investing in a big tobacco company.
The reality is that these big tobacco companies offer the only way to invest in the eCigarette market without taking tremendous risk with penny stocks and low quality companies.
I personally own shares of Lorillard for this reason and have enjoyed a nice 14% gain in less than three months. But if I were choosing one of these companies solely because of its eCigarette division I might also choose Reynolds American.
Its Vuse brand appears to be growing much faster than the other eCigarette brands and Reynolds American’s strong distribution network should help it steal more market share away from Lorillard and Altria.
Disclosure: Jay Taylor personally owns shares of Lorillard.
The One Company You’ve Never Heard of – But Smartphones Couldn’t Exist Without
Four months from now Apple will be releasing the most technologically advanced phone on the planet. And cautious estimates have them selling 200 million of them. While we love Apple (it’s in our 100k portfolio) we’re recommending a much less known company today…a company no one is talking about. A company that provides the technology, without which, smartphones couldn’t exist. It’s the company reaping massive profits each time a new Apple (or Samsung) smartphone is activated. In fact, as mobile data usage explodes in the year ahead, its stock is set to soar! Shares are already on the move. So, before this stock moves any higher, read our latest report for all the details: Click here for the full story.