Vector, a Discount Cigarette and Value Stock

Smart investing in times of economic turmoil usually means seeking out companies with indispensible products. There may be no more indispensible a product than an addictive one.

Cigarette companies have long terrified some investors due to the potential for lawsuit losses and general-public backlash, but Vector Group(VGR Quote) has too much upside to ignore.

Vector produces an array of discount cigarette brands as well as a new line of snus, a smokeless tobacco product, and, most interestingly, Quest, a new brand of genetically engineered low-nicotine and nicotine-free cigarettes to aid in the cessation of smoking. Vector has also diversified into real estate, with a wholly owned subsidiary, New Valley, and into alcohol, with a recent private placement of $4 million into Castle Brands, a premium spirits producer.

Quest is an ace in the hole for Vector. Currently, low-no nicotine options are only available in a handful of states, New York and New Jersey among them. Expansion into the South and Midwest could represent a huge opportunity. This could add substantial revenue as well as hedge against the anti-smoking push in America. Even assuming only minimal growth in other Vector brands' market share, Vector could grow substantially if Quest can gain a foothold in the smoking-cessation market. Also, other Vector brands have more than just minimal growth potential.

Brand loyalty is a difficult hurdle to overcome for cigarette manufacturers. Price, however, may start to necessitate a switch, which could create a windfall for Vector. We have already seen this start to happen in other products during the downturn. Customers are quickly abandoning their beloved but pricey Starbucks coffee for inexpensive home-brewed alternatives. Many smokers may follow suit and start to trade in their Marlboros, Camels and Winstons for Liggetts, Grand Prix and Pyramids.