This article is part of a Real Money series on a dozen companies investors should consider adding to their watch list of so-called "vice stocks."
Big Tobacco stocks tanked on Wednesday -- with Reynolds (RAI) leading the downward charge -- as many on Wall Street expect new watchdog powers to be finalized for the Food and Drug Administration over e-cigarette and so-called "vaping" technology.
Reynolds shares fell more then 4% on the day, making the cigarette giant the worst performer in the S&P 500, while Altria (MO) and Philip Morris (PM) -- fellow members of Real Money's "Vice Squad" watch list -- fell about 3% and 1%, respectively.
Cigarette investors appear to be growing particularly concerned this week as it's been nearly six months since the FDA submitted final drafts for a broader set of regulations, and many view the decision as imminent, according to Vince Willmore, spokesman for Tobacco Free Kids, an organization that advocates FDA oversight over all tobacco products.
There was also a report in The Hill Monday that the FDA could be announcing the rollout of this broadened scope of watchdog powers as soon as this week.
"Our concern with e-cigarettes is that they have been very irresponsible in the way that they've been marketed to kids, and we've seen a huge increase in the use of e-cigarettes," Willmore said, noting his group found e-cigarette use among U.S. high-school kids rose from 1.5% in 2011 to 13.4% in 2014. "There's an expectation that the rule will be finalized soon because the decision is long overdue," he added.
Meanwhile, analysts at Wells Fargo Securities appear unfazed in their Big Tobacco outlook, saying, if anything, today's pressure on shares does not change the foundational strengths of Big Tobacco stocks.
"Overall, it appears there's concern with potential headline risk from the long overdue final deeming e-cig regulations, which are speculated to be released imminently," Wells Fargo Securities analyst Bonnie Herzog said in a Wednesday report. "In our opinion, this reaction is overdone and we encourage investors to take advantage of the weakness and buy the stocks."
Electronic cigarettes are typically battery-operated products, according to the FDA, and essentially function by delivering nicotine and flavors by turning chemicals into inhalable aerosol, but many studies on health effects are pending or inconclusive, as the technology has only recently reached widespread popularity.
Philip Morris is among the brands so far to attempt to seize on the growing trend, rolling out on its own proprietary iQOS technology in November 2014, which aims to produce a hybrid version of electronic cigarettes with more traditional products, as Real Money reported. Part of the appeal to investors is that the newer technology helps insulate the companies against a sustained downturn in demand for traditional products.
E-cigarette and vaporized technology remains "broadly positive" for Big Tobacco, according to Herzog, primarily because it should increase the barriers to entry in the already competitive industry.
Despite e-cigarettes becoming a growth driver in companies such as Philip Morris -- which has designed its own -- the only major problem in which FDA oversight over e-cigarettes and so-called "vaping" is that it may restrict future innovation, but should not pose a major threat on the current business model of the major U.S. tobacco makers, Herzog said.
"Keep in mind, even if regs prove restrictive to innovation, this doesn't mean the end of the category, it just means growth could be slower," she added.