How Will E-Cigarette Trends Affect Stocks?

When we look at most of the global stock benchmarks, we can see that market valuations continue to hold at elevated levels. In some cases, like the S&P 500 and the Dow Jones Industrials, we continue to see stock values push into record territory. But while this is great for investors that are already long from the lower levels, this does make things difficult for investors that are without stock exposure and looking to enter into new long term positions. Risk to reward ratios favor the downside in all of the major stock indexes (adding the FTSE 100 and DAX into the mix), and this make it risky to start taking a bullish stance in these areas even though there is no immediate reason to believe that we will see any large equity declines any time soon.

Because of this, it will be important to look for individual sectors that are undervalued and still well-positioned for growth over the long term.
In order to accomplish this, it makes sense to asses some of the bigger earnings surprises that were seen in last year's markets. One of the best examples of this can be found in the electronic cigarette sector, which had a highly impressive sales performance in several geographical locations around the world for almost all of 2013. The best indicator of this can be seen in sales figures out of the US last year, where annual sales moved above $1 billion. So, even for investors that are not focused on US stock markets, the broader trends here are clear and it makes sense to start looking at the companies positioned in this space in order to identify one of the bigger potential growth drivers for the next few years.

Watching Industry Trends

"In UK markets we are acutely aware of the trends that are happening in the US, as this is likely to be matched in the UK, as well," said Sam Hadi at CloudCig. "Industry trends call for a continued rise in sales, as consumers make the shift away from the much more harmful paper cigarettes." When looking at the US markets, roughly 2.8% of the adult consumer population has already tried a product released by an e-cigarette company, which is largely surprising given the fact that comparatively little resources have been spent on marketing and advertising campaigns. Consumers appear to be willing to make the change to new products even though they have not become a large part of the media just yet. From a cultural perspective these are still very new products, so the much better than expected sales numbers should be viewed as a significant surprise and an indication that long term trends are certainly changing.

Well-Positioned Stocks

These sales numbers have already translated to significant improvements in the corporate earnings figures for a number of companies. As long as these trends continue, the companies that have devoted resources in these areas will also see gains. For those looking to gain global exposure, British American Tobacco (BTI) creates some interesting opportunities for investors focuses on UK companies with an international reach. The company owns several outlets in Europe in addition to a nearly 50% stake in Reynolds American, which means that the company will continue to have access to a wide variety of geographical markets. These are also some of the most important sales markets, so there are few companies that are likely to see performances that are as strong as British American Tobacco.

When looking at these stocks from an industry perspective, it will be important to continue paying attention to the companies that were established early in the e-cigarette space. The best example here can be found in Lorillard (LO), which continues to maintain one of the strongest presences in these new markets. If we see stronger numbers at Lorillard, we should see many other large companies start to jump on the e-cig bandwagon. This is something that has already been done by Altria (MO). So, in this group, we can see a collection of companies that should see long term gains based on the changing demographics of the cigarette smoking constituency.
By Richard Cox
Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. He writes for,,, TheStreet, Seeking Alpha, and the Motley Fool. Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally suggestive of time horizons of one to six months.

Copyrighted 2016. Content published with author's permission.

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