How to Invest in E-Cigs: The Cigarette of the 21st Century

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They look like cigarettes, feel like cigarettes, taste like cigarettes - and, smokers will tell you - satisfy the craving for a smoke.

But electronic cigarettes, or e-cigs, don't have any of the offensive smoke that's so harmful to health. Instead, they feature an odorless vapor in which nicotine is delivered to the user. And they're sometimes allowed in public places where cigarettes are banned.

Studies show e-cigs make smoking healthier for smokers and those around them, while also helping smokers quit.

Plus, e-cigs cost about half as much as regular cigarettes.

Big tobacco continues to place bets that electronic cigarettes can keep the tobacco industry and its annual sales north of $750 billion and growing.

Altria Group Inc. (NYSE: MO), the world's biggest tobacco company and parent company of Philip Morris USA, is the last of the three major U.S. tobacco firms to get into the e-cigs game.

"There is no denying that adult tobacco consumers have shown interest in it," Marty Barrington, Altria's CEO, told investors during an earnings conference call last week.

Thanks to increased health awareness, as well as the introduction of several taxes that have led to the price of packs more than tripling in some cities, cigarette sales began declining over 15 years ago and continue to do so, falling 6.2% in the first quarter of 2013.

Even though e-cigs were introduced almost 10 years ago, they are just starting to take off. Sales in the United States totaled $500 million in 2012 and are expected to double to $1 billion in 2013.

And a recent study by the Centers for Disease Control and Prevention found that 21% of adults who smoke regular cigarettes had used e-cigs in 2011, up from 10% in 2010.

So, now that e-cigs are growing more popular, what's the best way to invest in them?

The Best Electronic Cigarette Investments

Cigarette stocks are among the best "sin" stocks and have dramatically outperformed the market the past 10 years.

Besides Altria, which is a favorite at Money Morning and is included in the Money Map Report portfolio, here are three other e-cigarette stocks investors should consider:

Reynolds American Inc. (NYSE: RAI): The second-largest tobacco company, Reynolds produces Camel, Doral, and Winston products, accounting for 25% of U.S. tobacco sales. In 2006, it purchased Conwood, the second-biggest smokeless tobacco company in the United States, and had a limited launch of its e-cig Vuse last year. In 2013, Reynolds expects to sell Vuse nationwide and is getting ready to launch e-cigs with a heat source at the tip that heats rather than burns tobacco. (Reynolds introduced a similar e-cig, Eclipse, in 1996 and still sells it to wholesalers and retailers upon request.) Like Altria, RAI offers a healthy dividend just under 5% and is up 572% in the past 10 years.

Lorillard Inc. (NYSE: LO): The maker of Newport cigarettes, Lorillard is the third-biggest U.S. tobacco company and the oldest (founded in 1760). Newport accounted for 88% of Lorillard's sales in 2011, and to diversify in 2012, it acquired electronic-cigarette maker blu eCigs for $135 million. Blu eCigs had 2013 first-quarter sales of $57 million, up from $39 million only one quarter ago. LO offers a 5.1% dividend and has returned almost 605% the past 10 years.

Vapor Corp. (OTC: VPCO): Unlike the other companies, this is a direct play on e-cigs. In fact, Vapor Corp. is the only fully reporting, publicly traded electronic cigarette company in the United States. But compared with the above stocks, it's definitely the riskiest of these investments. Vapor Corp. designs, markets, and distributes e-cigs under the Fifty-One, Krave, VaporX, EZ Smoker, Green Puffer, Americig, Fumre Hookah Stix, and Smoke Star brands and is a possible takeover target for big tobacco firms. For 2012, it reported record net sales of $21.4 million, an increase of 33.6% year over year. In early January, VPCO tripled from 25 cents to 75 cents and has since sold down to 40 cents.

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