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Shares Of This Tiny Company Are Up More Than 550% In 2013 -- And Could Go Much Higher

It seems like every time I look up the e-cigarette market size, the number gets bigger. Latest projections have it reaching $3 billion by the end of 2013, doubling that of a year ago.

No surprise there. Companies, both start-up and Big Tobacco, have been free to innovate, market and sell products with no regulations or restrictions placed on them by the Federal Drug Administration. You can find e-cigs online and on shelves in most convenience stores now, sometimes right next to bubble gum and beef jerky. 

As a result, the one and only pure, public e-cig company's shares have been on a 572% tear this year. Plus, three Big Tobacco behemoths are dishing out dividends averaging 5%. 

Meanwhile, the debate is intense between opponents and proponents of tighter regulation by the Food and Drug Administration. Central to the issue is whether the FDA may extend the definition of "tobacco product" to include e-cigarettes. 

New restrictions will hopefully do what they intend to, which is not to allow marketing that encourages the smoking of e-cigs by the younger crowd or makes it easily available to them. The other side of the equation is to monitor and regulate what goes into e-cigs so that users at least know what they're inhaling. 

However, don't expect whatever the FDA does to interfere with the industry's rate of growth.   Any cool, new product that appeals to the younger generation, gives a sense of safety to users, and that still contains an addictive quality is destined to thrive.  

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There are already 3.5 million Americans who choose to get their nicotine fix by inhaling water vapor produced by these battery-operated devices -- another 43.5 million ignore cancer statistics and anti-smoking campaigns and smoke the traditional kinds.

Bottom line: While the e-cig industry is in its infancy and on the brink of facing regulation, the market here in the U.S. and internationally is still hugely ripe for tapping. Perhaps we might see future consolidation in the industry, with Big Tobacco buying up the smaller players, but e-cigs are here to stay -- be it good, bad or profitable.

Without further ado, here are the companies in line to profit from the e-cig generation. Let's start small.

Vapor Corp. (VPCO) is the only pure e-cig play among the group, albeit a tiny one with a $99.6 million market cap. Don’t let its size fool you though. This stock, trading at just $1.65 a share, has staggering potential even beyond the 572% gain current investors have enjoyed in just the past twelve months. 

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With a range of e-cig brands and no tobacco products to throw marketing money into like Big Tobacco companies, Vapor is in an enviable position to push full steam ahead. If you haven’t already heard about Krave, Vapor’s disposable e-cig; Smoke 51; Green Puffer and VaporX you probably will soon. Plus, Vapor plans to launch new products before the end of 2013 for both its VaporX line and VaporX Hookah Stix.

If its third-quarter 2013 performance is any indication of Vapor’s potential, it could be in for a banner year. The report, released on Oct. 21, showed an increase in earned income from 35.1% to 38.9% year-over-year. Plus, it turned operating income from a negative in 2012 (-$1.25 million) to a positive ($393,282) in 2013.

While Vapor is risky by virtue of its size, immaturity and competition, it has enough profit potential to buy at current prices. Plus, there’s always a chance that the company could be bought up by its larger competitors.

If you prefer a safer, more mainstream investment, try these titans of the industry:

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Altria Group Inc. (MO), the world's biggest tobacco company, manufacturer of Marlboros, and parent company of Philip Morris USA, was the last one of the big three to jump into the e-cigs market, seeking future sales growth because of the expected decline in cigarette smokers. It generates a healthy 5.2% dividend and is up 14% year-to-date. 

Wells Fargo estimates that Camel-making No. 2 Reynolds American Inc. (RAI) will have $4 billion in revenue from e-cigs in 2021 compared with $3.9 billion from conventional cigarettes. RAI offers a 5% dividend and is up 18% year to date. 

Lorillard Inc. (LO), maker of Newport cigarettes, is the third-biggest and oldest U.S. tobacco company. It acquired electronic-cigarette maker Blu Ecigs for $135 million in 2012 and had a 49% market share in third quarter 2013. The brand is already in 80,000 stores. LO offers a 4.2% dividend

Action to take: If you can tolerate the risk/reward factor with Vapor, I’d buy in small increments at $1.65, nearly 35% below its 52-week-high. You could see some sizable gains over the next few years.

-- Karen Canella

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