Small-Cap Tobacco Stocks Are Smoking in 2010

In good times and bad, drinkers drink, overeaters eat and smokers smoke. We aren't recommending any of these habits. But each of them brings a select few investors mounds of cash. Today, we’re welcoming you to the club.

Of course, when there is big money at stake, you typically see only massive corporations. Just look at these "sindustries."

Big Beverage consists of a relatively small number of public brewers and distillers. You have the choice between Anheuser-Busch InBev (NYSE: BUD), SABMiller (OTC: SBMRY) and Molson Coors (NYSE: TAP) — all sporting market caps in the multibillions.

For processed, pre-packaged food, you can choose between General Mills (NYSE: GIS), Kraft Foods (NYSE: KFT) and Kellogg Co. (NYSE: K) Each of these companies is valued at more than $20 billion.

Cigarette profits typically fall into the hands of Altria (NYSE: MO), Philip Morris Intl. (NYSE: PM) and British American Tobacco (AMEX: BTI). These three are all even larger…

But that doesn't mean that there aren't profitable options for small-cap investors right now. In fact, there are a handful of penny stocks that operate in this industry. One of them could be an easy triple in just a few months...

Emerging Tobacco Boom

Out of the 6.8 billion people on this planet, a whopping 1.1 billion consider themselves smokers. And despite what the Surgeon General wants you to believe, that number is rapidly growing. By 2025, an estimated 1.6 billion will be smokers — a 45% increase. Once you drill down to specifics, these stats are even more shocking.

The World Bank estimates that between 82,000–99,000 young people start smoking every day — roughly 85% from mid- or low-income countries, specifically in Asia.

Unfortunately, this trend isn't likely to slow down in the foreseeable future. As emerging economies around the world begin to see an expanded middle class, tobacco use skyrockets.

In India, one of the fast-growing BRIC countries, 37% of all men smoke bidis, a smaller, cruder type of cigarette. About 60% of all males over age 20 smoke in China. And an incredible 80% of males in Indonesia — the world’s fourth largest population — smoke. Compare that to the 23% of the male population that smokes in the U.S.

Judging by these numbers, smoking isn't going away anytime soon. Philip Morris Intl brought in $62 billion last year. Its former parent company, Altria, brought in $23.5 billion. And British American Tobacco saw revenue near $22 billion.

The amazing part about this story is how these companies do it – you see, in the tobacco industry there are a number of different niches, each with its own benefits for investors.

With the exception of British American Tobacco, large cigarette manufacturers are only good at two things: rolling a massive volume of cigarettes and selling them. They are usually classified under the tobacco industry, but they shouldn’t be. All these companies do is roll tobacco into cigarettes.

However, there's not much money in tobacco farming. The industry deals with high costs, large debt loads and extreme risks. A single storm can wipe out an entire crop. That’s all of a farmer's assets gone in a heartbeat. That's why these massive corporations stay out of tobacco growing, for the most part.

Considering these unique sets of problems, I’m not going to recommend a tobacco grower. And I certainly won't recommend a blue chip cigarette manufacturer. I wanted to tell you about just a couple small-cap tobacco companies that could pop in the near-term:

Vector Group (NYSE: VGR) – This small-cap cigarette manufacturer is sort of a miniaturized version of the big tobacco companies I just mentioned. Not only does Vector actually turn a profit in its tiny smoking niche - the company pays out a double-digit dividend to investors.

Star Scientific (NASDAQ: CIGX) – If you're after a more speculative tobacco play, Star Scientific could be it. This tiny development stage company is working on ways to make smoking safer by eliminating carcinogens from tobacco products - a potential slam dunk product, if they can pull it off.

Wellstone Filter Sciences (OTC: WFLR) – For the truly adventurous investors, this OTC-traded cigarette filter developer works on everything from a proprietary filter technology to its own tobacco blends and cigarette line. Keep in mind that this company is extremely volatile and prone to fast movement.