Yahoo Finance Why Sin Stocks Are an Investor's Salvation
If socially responsible investments appeal to investors' do-gooder tendencies, sin stocks speak to the darker side of human nature.
Sin stocks include companies whose activities are viewed as unethical or immoral. Ethical concerns aside, there are some solid reasons to make room for sin stocks in your portfolio.
"In the long term, vice investing makes sense because these are often well-managed companies with generationally established brands and extremely loyal customers," says Jordan C. Waldrep, portfolio manager of The Vice Fund (ticker: VICEX).
[See: 7 Classic Inflation Hedges and Their Thorns.]
Waldrep says that on paper, sin stocks represent the kinds of companies investors should want to own for the long haul. But they often shy away from them because they're considered socially taboo or have a negative reputation.
That's a missed opportunity, he says.
"The vice sectors have excellent global tailwinds for growth tied to the emerging markets, yet these sin stocks are often at a discount as some investors ignore them," Waldrep says. "The result is that investors can buy vice stocks that offer growth at a relative discount in the market."
Sin stocks can also be a savior when the mainstream market dips.
"Vice stocks have historically performed well," says Robert Baltzell, president of RLB Financial in Valencia, California. "People will continue to drink, smoke and own guns, but investing in those types of companies isn't for everyone."
If you can get over the moral hump, sin stocks could spice up an otherwise bland portfolio.
Cannabis stocks have budding potential. "The cannabis industry is a huge threat to incumbent companies in the spirits, wellness and pharmaceutical fields," says Sanjay Tolia, founder and managing partner at Bengal Capital in Chicago. "We feel the size of the market is hugely underestimated in current analyst estimates."
Tolia says that as the regulatory environment shifts, the highest-quality producers will be natural candidates for acquisition. Canada's recent move to legalize recreational marijuana could persuade the rest of the world to follow suit. "We expect those who prove they can grow the highest quality product at the lowest cost under those restrictions to emerge as winners in Canada and internationally."
The biggest problem with cannabis stocks is their small size and relative illiquidity, says David Russell, vice president of content strategy for online trading platform TradeStation.
"It's not clear how companies can add value or defend market share in a commodity product with relatively low barriers to entry," he says. "That, in turn, could make it hard to achieve the kind of scale needed to drive multi-billion-dollar public firms."
Tolia says the biggest risk for investors is companies not being able to deliver the results they promise. Understanding how cannabis companies scale and reviewing their track record is critical.
Investors may score a win with gambling and gaming stocks. Waldrep says gaming stocks are a good buy thanks to two major trends. The first is the expansion of gaming in Chinese Macau and China's overall economic outlook.
When China modified gaming in Macau to its current form in 2002, the market was largely underdeveloped. In 2017, Macau produced $33.1 billion in gaming revenue and as tourism increases and additional casinos open, that trend should continue. VIP gambling is a risk factor, since more than 50 percent of revenue is connected to a select group of players, but investors shouldn't ignore the possibilities of casino stocks.
[See: 8 of the Best Stocks to Buy for the Rest of 2018.]
The Supreme Court's recent ruling in Murphy vs. National Collegiate Athletic Association is another boon for gaming investors. That case opened the door to domestic sports betting at the state level, offering casinos room to expand. Russell says the gaming-related companies that have done best in recent months tend to be smaller firms, including those with exposure to sports betting in the U.S.
Japan may be a wild card in boosting gaming stocks.
"The government of Japan approved the first of two bills to legalize casino gambling in December 2016," Waldrep says. "Since then, the government has been working toward releasing the regulatory structure of the market in the second bill."
Shinzo Abe, Japan's prime minister, has expressed interest in having casino gaming in place for the 2020 Olympics scheduled to take place in Tokyo. "Should this move forward, the opportunity for international casinos to partner with Japanese business interests to create Las Vegas-style casino resorts in Japan would be significant, with estimates ranging from $10 billion to $28 billion in revenue," Waldrep says.
That all adds up to an outlook for sustained long-term growth in the gambling and gaming sectors.
Alcohol and tobacco stocks could be a stress-reliever in a turbulent market. Investing in alcohol or tobacco companies can pay off when a market downturn is on the horizon.
"The outlook for alcohol stocks is good," Baltzell says, since "vices usually do better when the economy is bad."
Constellation Brands ( STZ), for example, which owns major brands such as Robert Mondavi, Clos du Bois, Corona and Negro Modelo, saw its shares increase by 49 percent in 2017, compared to the 19 percent gain experienced by the Standard and Poor's 500 index.
Tobacco stocks may be particularly worthy of your investment dollars, as "these are high cash flow businesses that pay significant dividends to shareholders," Waldrep says. He cites Altria Group ( MO) and Philip Morris International ( PM), which currently pay dividends of 4.5 percent and 5.5 percent respectively.
"There are concerns about long-term reductions in smoking, but that's been going on for decades," Waldrep says. "Investors should remember that millennials have some of the highest smoking rates among Americans, so tobacco isn't going anywhere."
He adds that if marijuana is legalized on a widespread scale, the tobacco industry could make a move into the cannabis sector. What investors must watch out for with these sin stocks is government regulation and taxation.
"The government will likely continue to increase taxes on alcohol and cigarettes," Baltzell says. "Government regulation and taxes could affect higher end producers of alcohol; when taxes go up, fewer people are going to drink."
Defense stocks get a bump from budget increases. Congress approved an 18 percent increase in defense spending for the 2018 fiscal year and military spending isn't likely to decrease any time soon.
These budgets fund long-term projects that should support defense companies' long-term cash flow predictability, Waldrep says. Cyber warfare accounts for a significant part of defense spending domestically and on the international stage.
NATO is also outlaying more money on defense. By 2024, the goal is for 15 NATO nations to spend 2 percent of gross domestic product on defense, Waldrep says.
[See: 7 Ways to Retire Without Social Security.]
"This offers opportunities for defense makers overseas as well as growing markets for domestic defense contractors to participate in," he says, with investors reaping the benefits.
More From US News & World Report
