Last week, CNBC's Jim Cramer watched the long-standing tobacco sector get obliterated as Wall Street sentiment on the space turned starkly negative.
"We saw the market's sudden recognition that the cigarette industry seems to be in serious trouble, disrupted by the rise of vaping," the "Mad Money" host said on Monday.
"Over the course of three short days, the tobacco stocks were bent, they were spindled and they were mutilated by the realization that electronic cigarettes have become a serious threat to the old-school cigarette makers," he continued.
The cigarette industry used to be fairly predictable, Spielman wrote in his Altria takedown to "neutral" from "buy." Until recently, cigarette volumes would consistently fall 3 to 4 percent from year to year. In response, tobacco companies would raise cigarette prices.
But the explosion of vaping has raised grave concerns about the fate of tobacco makers like Marlboro parent Altria and Philip Morris International, which owns the international rights to Altria's brands, despite lingering questions about the health risks of vaping.
Practically a tobacco industry obituary, Spielman's analysis cited the serious threats increasingly popular electronic smoking devices like Juul pose to cigarette makers, Cramer said.
Juul Labs now controls almost half of the e-cigarette market, boasting year-over-year sales growth of nearly 800 percent in 2017. Its flagship product, a small, discreet vape pen with higher nicotine levels than its competitors, has even caught on with teenagers.
"Morality aside — not easily done, but work with me here — this thing is selling like crazy and it's really eating into the tobacco industry in a way that other e-cigs never could," Cramer said. "According to Nielsen, U.S. cigarette volumes shrank by 6 percent in the first quarter, substantially worse than expected, and Spielman ascribes the difference to Juul."
Spielman didn't see much runway for tobacco giants in the long term, either. Some cigarette makers, including Altria, have introduced Juul-like products, but the Citi analyst worried they could sacrifice earnings growth by moving into the low-margin vape pen business.
"While the tobacco companies can get into the vaping business, their own vape pens tend to be money losers," Cramer explained. "Who would want to swap out of an incredibly profitable business and into one that's losing money?"
The Citi downgrade was underscored a day later by a disappointing earnings report from Philip Morris International. While the headline numbers beat analysts' estimates, Cramer said "the underlying trends were just plain terrifying," with total volumes down 2.3 percent and its flagship Marlboro brand down 7 percent overall.
Philip Morris' numbers looked even worse region to region: the European Union was down 6.7 percent; Eastern Europe was down 10.4 percent; the Middle East and Africa were down 8.5 percent; East Asia and Australia were down 18.3 percent; and Latin America and Canada were down 1.5 percent.
The only positive growth region was South and Southeast Asia, up 6.1 percent, but it barely offset the otherwise "devastating" landscape, Cramer said.
Considering the pain, the "Mad Money" host did not recommend investing in the tobacco space, adding that he would watch Altria's Thursday earnings report "like a hawk."
"Bottom line: last week investors realized, practically overnight, that the tobacco industry is facing an existential threat from its vaporizer competitors, led by Juul Labs," Cramer said. "And while the group got obliterated last week, I think it could even have more downside."