How to Invest in E-Cigarettes

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It's clear to everyone that Philip Morris International (NYSE: PM) was correct when it declared the future was going to be "smoke free." The number of smokers declines every year, and while tobacco company profits are still growing, it's only because they're virtually able to raise prices at will.

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But if the future is one where cigarettes will be a thing of the past, then investors need to look where these giants will make their money. And it is going to be in some form of electronic cigarettes.

Despite many anti-smoking advocates contesting whether the devices are actually healthier than combustible cigarettes, since most of the chemicals associated with the harm caused by traditional cigarettes are found in the smoke, proponents respond that creating a vapor can allow for a safer mix of chemicals. And both sides can point to studies proving their point.

Health authorities in the U.K. and elsewhere have stated outright that e-cigs can be a safer alternative than smoking and view the devices to be another tool in weaning more smokers away from combustibles. But with several competing technologies on the market, let's look at each more closely.

Cigalikes

These first-generation e-cigs give the user the look and feel of smoking a traditional cigarette. Slim, about the size of a pen and shaped like a cigarette, the so-called "cigalikes" are what many people initially associate with electronic cigarettes, along the lines of Imperial Brands (NASDAQOTH: IMBBY) popular blu eCig.

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Originally developed by Lorillard, but sold to Imperial when the former was acquired by Reynold's American, at one time it owned nearly half the e-cig market. Like similar first-gen e-cigs, such as Altria's (NYSE: MO) MarkTen and Green Smoke systems, blu eCigs are battery-powered devices that contain a heating element and a cartridge filled with a nicotine-infused flavored e-liquid solution. When heated, the liquid creates a vapor that is then inhaled. Cigalikes have the benefit of often costing less to get started than other types of e-cigs, and come in both pre-filled versions and refillable styles.

Later iterations have enhancements to them, such as Reynolds' Vuse, which is Bluetooth-enabled to let you connect wirelessly with your e-cig. British American Tobacco (NYSE: BTI) corrected one of the chief complaints against e-cigs, which was their chemical tasting flavor due to the use of e-liquids. Although its glo iFuse device also heated an e-liquid to create a vapor, it then drew the vapor back through actual tobacco to give it the real tobacco taste people were looking for.

Vape pens

While cigalikes may be cheaper, another of the criticisms users had was with their limited size and battery life. Manufacturers then created the vape pen, a personal vapor system (PVS) that was much larger than an e-cig and allowed for greater e-liquid capacity and longer use times. You can often easily distinguish a PVS user as many times their heads will be wreathed in a cloud of vapor.

While the original versions were slightly larger than cigalikes, more advanced devices followed that allowed for full customization of the "tank" -- giving them their name "mods" -- and come in a tubular shape or a more box-like form.

After the original popularity of e-cigs, vapor devices suddenly gained traction and prepared to overwhelm the market. Lorillard was so worried about vaping devices that it wanted the FDA to ban them. But it may be the latest technological innovation that ends up being the future of the electronic cigarette industry.

Heat not burn

Like British American Tobacco's glo iFuse, e-cigs using heat-not-burn (HNB) technology also rely upon real tobacco to deliver flavor, but, unlike their forerunner, they don't use any liquids. Instead, the technology allows the tobacco to be heated up to a point where it creates a flavorful nicotine-containing vapor. Because it delivers the most smoking-like experience to the user, but without all the toxic chemicals smoking producers, and keeps producers in their tobacco wheelhouse, heat-not-burn devices are the ones most likely to reshape the industry.

The leading manufacturer of HNB e-cigs is Philip Morris International, and its iQOS device is marketed internationally under the Marlboro brand with HeatSticks. It's a two-part device featuring a tobacco-filled miniature cigarette and a heating unit. The cigarette portion (the HeatStick) is inserted into a device that looks something like a PVS, which is inserted into the iQOS heating device. The e-cig is heated to 350 degrees Celsius (662 degrees Fahrenheit), a much lower temperature than combustibles achieve, which is around 800 degrees Celsius, or almost 1,500 degrees Fahrenheit. The whole device is removed and "smoked" just as you would a combustible cigarette, and the HeatStick is thrown away when its finished.

British American also makes an HNB device, the glo (not to be confused with the glo iFuse), which operates on a similar principle, as does its recently acquired Reynolds American subsidiary. In fact, Reynolds was first to market with an HNB device in 2014, but had the misfortune of being ahead of its time.

Also, Japan Tobacco (NASDAQOTH: JAPAF) has its Ploom Technology division that has successfully sold heat-not-burn devices in Japan.

The future of smoking

We'll probably never see the first-generation electronic cigarettes or personal vaping devices really disappear from the market. E-cigs are a cheaper alternative than their current HNB brethren, and provide an easy gateway for those wanting to quit smoking. PVS's, on the other hand are seemingly preferred by those who want to avoid nicotine-containing e-liquids (first-gen devices offer non-nicotine e-liquids too). 

Heat-not-burn technology has the virtue of still including tobacco, which many see as offering advantages in taste. Yet is undoubtedly a healthier alternative for smokers, but it's still probably very addictive, as Philip Morris has found that levels of nicotine absorption for iQOS users are similar to those found among cigarette smokers. 

Yet regardless of the avenue users choose, it's clear the future will be one viewed through a haze of vapor, not smoke.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.