GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Three Cigarette Stocks Positioned for Growth in New Markets

June 25, 2014 | About:

Tech has given us a lot more than iPads and advanced cell phones in the last decade, and some of the biggest growth advancements have been seen in the consumer health space -- specifically in electronic cigarettes. As global consumers look for healthier alternatives, some of the biggest players in traditional markets have stepped in and are looking for buy up smaller companies that manufacture electronic cigarettes. For investors, this means that there will be several important factors that will be influencing traditional markets in the next few years. Anyone looking for long-term value should consider accumulating stocks with exposure to this space, and here we will look at three companies that are well-positioned to capitalize on the newest trends in these industries.

“Overall sales rates last year were much higher than markets had originally anticipated,” said Sam Hadi at CloudCig. “E-cigarette sales in the US topped the $1 billion mark for the year, and these trends are unlikely to abate in 2014.” A performance like this might not sound completely surprising, given the size of the US market. But was truly is surprising is the fact that these kinds of numbers were generated without the long-term presence of the major market players in this space. In fact, some of the bigger names in the business (some of these will be described below) have only recently started gaining exposure to segments that are able to produce marketable e-cigarette items. But these most also suggest that the “writing is on the wall” and that e-cigarettes will be the way for the future.

Broader Trends

All of this is not to suggest that we will see the traditional paper cigarettes replaced any time soon. In any market, there will be consumer holdouts and brand loyalty factors that could slow some of the progress that is made in the more technologically advanced (and healthier) e-cigarettes. But when we understand that nearly 3% of adults in America have already tried an e-cigarette, the prospects for sales growth in several key companies is undeniable. It might be tempting to look at small caps as the best way to express this bias. But larger cap alternatives should not be entirely forgotten either, as this is still a very new market and there is a good deal of growth that can be generated even at the larger companies. In the US alone, 2.5 million Americans have already made the switch to e-cigarettes, and consumer surveys show that these numbers are only likely to grow in coming years.

Companies to Watch

For stock choices, some of the companies that are now best positioned to benefit from these trends can be found in Lorillard (LO), British American Tobacco (BTI), and Altria (MO). These stocks also carry impressive dividend yields as an added incentive along with their new growth prospects. Lorillard was one of the first of the industry majors to enter into the electronic space. For this reason, it will be important to monitor the company’s success in marketing its new products as a way of gauging what is likely to be seen in its competition. Lorillard’s purchase of Blu eCigs two years ago was a benchmark move and indicated the company’s decision to focus more heavily on this space.

Next is British American Tobacco, which is a good way for investors to gain global exposure to the expanding sales seen internationally. The company’s Vype e-cigarettes will be rolled out in retail stores in the coming months, and its 42% ownership stake in Reynolds American create an attractive asset portfolio that will be able to capitalize on multiple markets. The stock has a dividend yield of 2.7%, and looks from from a growth perspective as well. Last is Altria, which has made large acquisition decisions to fend off some of the competition and establish a stronger presence in the electronic space. The stock has a dividend yield of 5.2%, and this helps to protect against any potential downside seen in the underlying valuation.

In all, these stocks should be considered by anyone that is looking to gain exposure in one of tech's few new markets. The broader sales trends here are clear and there is little reason to believe that these companies will see difficulties here for the remainder of the year. Take this along with the strong dividend yield, and some winning stock plays become apparent.






 

About the author:

RichardCox
Richard Cox is a university teacher in international trade and finance. Lecture halls of 80 to 120 students. Lessons in macroeconomics and price behavior in equity markets. Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stocks, commodities, currencies).

Trade ideas are generally based on time horizons of one to six months.

Follow me on Twitter: @Richard_A_Cox

Visit RichardCox's Website


Rating: 0.0/5 (0 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide