In retrospect, we should have known it was too good to be true. “Vaping,” the seemingly safer alternative to smoking cigarettes, may not be safer after all. As of the latest tally, 530 people have been diagnosed with problems that almost certainly have been caused by the pen-sized devices. Six people have died.
The risks have become pronounced enough to prompt some states to outright ban flavored vapes, and the nationwide movement to ban flavored e-cigarettes is gaining decided traction. Meanwhile, some cities have banned all sales of any vaporizers and their required supplies … perhaps a precursor of what’s ahead from coast to coast.
In short, the nascent vaping industry is already fighting for its life.
Clearly that’s bad news for some stocks of companies that were counting in the category’s growth. The safety-minded effort isn’t just lengthening the list of names to avoid, however. There are a handful of stocks to buy on the heels of vaping woes, as they’re positioned to benefit from the redirection of consumer vices.
Canopy Growth (CGC)
Recommendation: Buy CGC stock
It would be unreasonable to suggest every current fan of vaping would immediately take up smoking recreational pot … particularly in light of the fact that the vaping headwind is largely in the U.S., and Canopy Growth (NYSE:CGC) serves the Canadian market.
On the flipside, it wouldn’t be unreasonable to assume a wide swath of Canada’s vapers that have seen it cause serious health problems wouldn’t look for the next-best alternative.
To that end, Canopy has something of an edge in terms of capturing those defectors. Although vaping is part of the company’s business model, perhaps more so than most of its rivals, Canopy is preparing for a near-term future with a heavy dose of edibles and beverages. Investors may have lost sight of that prospect, throwing the proverbial baby out with the bath water.
Aurora Cannabis (ACB)
Recommendation: Sell ACB stock
On the flipside, merely being in the cannabis business doesn’t inherently position a player to catch a swath of the crowd that’s now suddenly looking for a new kind of vice. Aurora Cannabis (NYSE:ACB) CCO Cam Battley, for instance, made a point of saying during the company’s conference call earlier this month that vaping was intended to be a key part of its growth.
What that meant or means in quantifiable terms isn’t exactly clear; it’s not likely the company can even say within a broad range what vaporizers mean as a direct and indirect driver of sales.
But, in qualitative terms, Aurora’s Executive Chairman’s Michael Singer’s comment “I am very worried about what I’m reading in the U.S.” speaks volumes.
Altria Group (MO)
Recommendation: Sell MO stock
Most investors know Altria Group (NYSE:MO) is a cigarette behemoth, parent to Marlboro as well as smokeless tobacco brands Skoal and Copenhagen.
Both are fading businesses though, prompting the company to wade deep into more modern and seemingly more reliable ventures like vaping. Altria is 35% owner of vaporizer name Juul, which is arguably the premier name in the e-cigarette business. It’s the name behind about one-third of all e-cig sales, and commands roughly two-thirds of brick-and-mortar sales of the device.
That oversized market share, of course, makes Altria Group shares overly vulnerable … vulnerable enough to prompt Piper Jaffray analyst Michael Lavery to downgrade MO stock to “Neutral.” He explained, “We expect cigarette volume declines could potentially moderate and return to more typical historical levels, and iQOS (see below) is likely to benefit. However, before any potential benefit would be clear, we expect Altria’s stock would first trade off on negative FDA news, especially given the $13B it spent on its JUUL stake.”
Philip Morris (PM)
Recommendation: Buy PM stock
What’s iQOS (pronounced EYE-kose)? It’s an electronic device made by Philip Morris (NYSE:PM), acting as a hybrid of conventional cigarettes and vaporizers. It heats tobacco into a smokable form without actually burning it. Ergo, it doesn’t pose the potential health threat — presumably — that combustion-produced smoke does.
Philip Morris’ interest in such a product is clear. Altria was interested too though, so much so that it had planned to merge with Philip Morris to cultivate a new product category that will undoubtedly draw interest from those who now suddenly fear the dangers of vaping.
Jaffray’s Lavery fears the dust-up threatens that planned pairing. But, with vaporizers suddenly under fire, perhaps Philip Morris doesn’t need Altria’s help now anyway. It has an increasingly marketable product in iQOS, assuming it doesn’t become the next target of worried regulators and lawmakers.
Cronos Group (CRON)
Recommendation: Sell CRON stock
And where does cannabis company Cronos Group (NASDAQ:CRON) fall on the buy/sell scale in an environment with a growing distaste for vaping? It has earned a spot on a list of stocks to sell, although not just because it was expecting consumers to expand their use of vaporizers. Cronos also has strong ties with a now-beleaguered Altria, which itself was betting big on the mainstreaming of vaporizers.
All told, Altria owns a 45% stake in Cronos … a partnership formed largely as a means of Altria gaining access to the burgeoning cannabis market, and a deal that lets Cronos use the knowledge and resources of a much bigger and better established name. As Cronos CEO Mike Gorenstein put it at the time, “Altria’s investment and the services they will provide to Cronos Group will enhance our financial resources and allow us to expand our product development and commercialization capabilities.”
If vaping is facing a headwind, the degree of Altria’s interest in (and time for) Cronos is called into question.
Imperial Tobacco Group (IMBBY)
Recommendation: Buy IMBBY stock
Yes, Imperial Tobacco Group (OTCMKTS:IMBBY) is another “big tobacco” kind of company, struggling with a worldwide smoking cessation trend and now facing an unknown vaping future; Imperial Tobacco is the name that owns vaping brand Blu.
Imperial Tobacco is better positioned than most of its rivals though, thanks to its geographical diversity. This helps make it one of the stocks to buy among the vaping crisis. It’s a huge name all over Europe, where vaping hasn’t become overwhelmingly huge in the first place, and where the anti-smoking movement isn’t getting as much traction.
The company also takes product development much more seriously than its rivals, appreciating the fact that self-regulation is a much better option than government-imposed regulation. While breathing anything but air is more dangerous than not, Imperial isn’t afraid to say “We want smokers to switch to less harmful alternatives and have developed a range of Next Generation Products that have the potential to reduce smoking-related disease.”
Recommendation: Buy UVV stock
Of all the stocks to buy or sell that earned a spot on this list, Universal (NYSE:UVV) is likely to be the least recognizable one. That’s by design, and not surprising. The company was built to remain in the background, supplying dried tobacco leaf to the likes of Altria and Philip Morris, who then turn it into cigarettes.
It’s still facing the uphill battle of smoking cessation, which will eventually kill the entire industry.
That’s a scenario that’s years or even decades down the road though, and it’s the cigarette companies themselves that face the bulk of that liability. Indeed, as smoking continues to fall out of favor, Universal is positioned nicely to scoop up market share enjoyed by the demise of smaller tobacco leaf providers.
Recommendation: Buy GSK stock
Each name laid out thus far has been a stock to buy or sell based on an assumption that consumers will choose one vice or another. There’s a third possibility, though, that many current smokers and vapers finally embrace. That is with a new wakeup call now in place, they could altogether quit inhaling anything other than air.
Enter GlaxoSmithKline (NYSE:GSK).
You may not realize it, but Glaxo is the pharma company that owns Nicorette — the chewing gum that helps smokers wean themselves from a nicotine addiction. It also markets alternatives to smoking-cessation gum, via a brand called nicotinell.
It’s not necessarily a major breadwinner for the company. But, the “quit-smoking” product industry is worth more than $1 billion per year. Even if only a tiny portion of the nearly $900 billion the world spends on cigarettes every year is diverted in GlaxoSmithKline’s direction though, it could prove to be a nice, easy boost to the company’s bottom line.
22nd Century Group (XXII)
Recommendation: Buy XXII stock
GlaxoSmithKline isn’t the only outfit that’s positioning to capitalize on outright quitting rather than fueling the habit. Tiny 22nd Century Group (NYSEAMERICAN:XXII) is doing the same thing. It’s just taking a different approach.
22nd Century Group engineers and breeds tobacco plants. On the surface it seems like a dead-end MO. This isn’t your typical tobacco, however. Its strains can be nearly nicotine-free, helping to abate an addiction without smokers even fully realizing they’re weaning themselves.
And for smokers with no genuine desire to stop enjoying the effects of nicotine, the company also breeds tobacco with a minimal amount of tar in it.
Turning Point Brands (TPB)
Recommendation: Sell TPB stock
Finally, add Turning Point Brands (NYSE:TPB) to your list of stocks to sell now that vaping hysteria has taken hold.
Lots of companies make and sell the vaporizers that have suddenly fallen out of favor. None are as dependent on vape sales as Turning Point Brands, however, which operates the very popular vape-sales website Vapor Beast. Vaporizers and ancillary products made up nearly half of last quarter’s top line.
To its credit, Turning Point has worked to get out in front of off-base assumptions, issuing a statement this week that the CDC’s and the FDA’s chief concern pertains to a kind of product the company doesn’t even sell. Even erroneous perceptions can turn into problems though, and TPB stock is arguably in the wrong place at the wrong time.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.