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E-cigs vs. tobacco: Here’s where to find value, pro says

Smoking is on the decline and e-cigarette sales are on the rise, putting holders of tobacco bonds at risk. But don't count big tobacco out, one investment pro said.

In fact, he thinks it's the perfect time to jump into tobacco stocks, and he wouldn't count the bonds out either.

"Big tobacco is not in denial on e-cigs," Lee Munson, chief investment officer of Portfolio Asset Management, said in an interview with CNBC's "Street Signs."

"From the stock position, this is the time where you make your money—where there's a lot of uncertainty, there's value out there and you buy it before we have confirmation that big tobacco figured out how to get their hands on e-cig profits."

Marlboro cigarettes, a product of Philip Morris International
Daniel Acker | Bloomberg | Getty Images
Marlboro cigarettes, a product of Philip Morris International

Americans have given up smoking at a faster rate than it was estimated when tobacco bonds were sold. Many of the bonds were structured to withstand a smoking decline of 2 to 3 percent, but cigarette consumption has dropped an annual average of 3.4 percent since 2000. Add to that the recently popularity of e-cigarettes, and smoking is falling even faster. Analysts are predicting some bonds could default before the end of this decade.

Read More E-cigarettes could stub out tobacco bonds sooner than thought

"The problem is these bonds are very long term and it's a risk trying to predict," said Steve Malanga, senior fellow at the Manhattan Institute.

"This is a very uncertain market right now," he added. "It's one thing to buy the stock, it's another thing to invest for let's say a decade or more in their bonds."

Read MoreFDA values lost pleasure from e-cigarette rules

Portfolio Asset Management's Munson thinks the states will try to find a way to make the bonds work out because they need the revenue.

"They're going to figure out how to tax those e-cigs and that's where you're going to get the industry consolidation," he said.

That's because big tobacco knows how to deal with bureaucracy and lobbyists, and if e-cigarettes are taxed and regulated, he thinks the companies will sell to big tobacco.

"The reason you want to be in these things now is because there is that uncertainty. Uncertainty is where you find value, and value is where you get higher expected returns. You have to take the risk," Munson said.

Read MoreSome e-cigarettes deliver a puff of carcinogens

—By CNBC's Michelle Fox. Reuters contributed to this article.

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