Victory believes the newly merged entity of Victory and Fin will have sales of $100 million in 2014. Assuming Victory can reach $500 million in revenues by 2018, applying an enterprise value-to-sales of 3.2 times would lead to a fair enterprise value of $1.6 billion. Victory's current enterprise value is $654 million leading to upside of 144% over the next five years, or a 20% annualized return.

Vapor had sales of $23 million over the trailing 12 months. Assuming Vapor is able to double revenues to $50 million in 2014, and --like Victory -- has a fivefold increase in revenue over the next five years, at the end of 2018 Vapor's revenue will be $250 million. Applying an enterprise value to sales of 3.2 times, Vapor's fair value in 2018 is roughly $800 million. With a current enterprise value of approximately $100 million, Vapor's up side is 660% over the next five years, or a 46% annualized return.

Investing Decisions

The three pure plays in the e-cig industry are all traded in the OTC marketplace at present.

They are all very speculative. There are severe risk factors, such as federal, state and local regulation and/or taxation.

Rumors fly every day -- be very careful when you enter orders on these three OTC-listed stocks.

It is very important that you enter limit orders -- and if you miss it, you miss it.

However, we believe that a 5% position in the group of three is warranted at this time. If you want to be conservative, invest in the major cigarette manufacturers that have entered the e-cig business as a hedge.

The e-cigarette market is growing at a very rapid pace. The big tobacco players are entering the market and are a way to play this sector.

In the short term, e-cigarettes will not alter the performance of these players. In the long run, these companies must position themselves so the disruptive technology that is e-cigarettes does not threaten their survival.

For more focused access to the e-cigarette market, Victory Electronic Cigarettes, Vapor and mCig are  over-the-counter pure plays. These stocks are more risky, but the growth in the e-cigarettes market will significantly increase the intrinsic value of these players.

Victory is pricing in much more growth than Vapor due to its international expansion and strong management team. Victory's recently announced  acquisitions might take their current run rate over $100 million in revenues in 2014.

Vapor has one of the largest retail distribution networks in the United States (third to Lorillard and NJOY) and is much more modestly valued by the market.

In the long run, I see e-cigarettes smoking traditional tobacco in the marketplace.

Harris Shapiro is the publisher of The Focused Stock Trader.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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