A few years ago seeing someone “vaping” (verbiage used to describe “smoking” an e-cigarette) on a city sidewalk would most likely have raised eyebrows. Today it is commonplace.
E-cigarettes, or electronic cigarettes, have been around for over a decade, but have recently risen to prominence as traditional tobacco companies have entered into the market in an effort to capitalize on non-traditional smokers.
BIG GROWTH NUMBERS
Let’s take a quick look at the stats behind the e-cigarette market.
In 2008, U.S. e-cigarette sales totaled $20 million and have at least doubled every year since. 2009 saw a jump to $39 million, 2010 $82 million, 2011 to $195 million, and 2012 saw a whopping $500 million in e-cigarette sales. Sales figures for 2013 are projected to be in the billion dollar range.
THE KEY TO QUITTING
It’s not hard to see why. Although they can’t claim to be such because they lack the required FDA approval, e-cigarettes are seen by many as the key to smoking cessation.
In fact, 31% percent of people who quit smoking reported having tried e-cigarettes. At the outset of 2013, there were 2.5 million e-cigarette smokers in the U.S., compared to 45 million regular smokers.
HOW TO PROFIT
While these figures may be fascinating, traders are undoubtedly asking themselves how to capitalize on this new trend?
THERE ARE SEVERAL PLAYERS
While many would assume that Phillip Morris, parent company to Altria (MO) and maker of the popular Marlboro and Parliament brands, would be the first to market with their own e-cig this isn’t the case. Altria announced in June they would release their first e-cigs in August, under the MarkTen brand. Instead, the best bet for traders is the Greensboro, NC based Lorillard (LO); makers of the Newport brand the Blu brand of e-cigarettes. While the Blu brand held only two percent of the e-cigarette market share at the end of 2012, it is now estimated to be over 37 percent.
Traders desiring to more directly play the expanding e-cigarette market might turn to Vapor Corp (VPCO), the only publicly traded e-cigarette company in the U.S. However, with increasing competition from LO, MO, and Reynolds American (RAI), this is the riskiest play. It is also a likely acquisition target of the big tobacco companies, as they seek to increase their presence in the space.
MY TOP PICK
Based on recent trends in the market, Lorillard is my e-cigarette play. Newport sales are impressive, representing 88% of total revenue. LO is also known for its marketing ability, as Blu’s meteoric rise to capture over a third of the market is testament to this.
Shares are trading $43.25 pre-market, and shares are up eight percent on the year. Trading above the 20 and 200 day moving averages, the chart looks strong and the stock appears to be poised to make a run to its recent high-close of $46.50.
THE TRADE
Buy the LO Oct 42.5-45 Bull Call Spread
Risk: $110 per one lot
Reward: $140 per one lot
Breakeven: $43.60
