{"id":30991,"date":"2012-07-19T09:47:04","date_gmt":"2012-07-19T13:47:04","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/07\/not-all-sin-stocks-are-created-equal\/"},"modified":"2012-07-19T09:47:04","modified_gmt":"2012-07-19T13:47:04","slug":"not-all-sin-stocks-are-created-equal","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/07\/19\/not-all-sin-stocks-are-created-equal\/","title":{"rendered":"Not All Sin Stocks are Created Equal"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

Sin stocks.\u00a0 Vice investments.\u00a0 Merchants of death.\u00a0 They all sound delightfully naughty, don\u2019t they?<\/p>\n

That\u2019s because they are.\u00a0 Based on the recent returns of alcohol and tobacco stocks, investors might conclude that it\u2019s good to be bad.\u00a0 In a year marked by macroeconomic shock waves emanating from Europe, popular sin stocks like Altria ($<\/span>MO<\/a>), Philip Morris International ($<\/span>PM<\/a>), Diageo ($<\/span>DEO<\/a>),<\/strong> and Anheuser Busch InBev ($<\/span>BUD<\/a>)<\/strong> are all trading near 52-week highs.\u00a0<\/p>\n

Over long investment time horizons, the story is much the same.\u00a0 Vice investments tend to outperform the broader markets by a significant margin over the long haul.\u00a0 In his eminently readable book The Future for Investors<\/em><\/a>, Professor Jeremy Siegel found that the most profitable stock market investment in U.S. history was tobacco giant Altria\u2014and this despite decades of falling tobacco usage among Americans and an endless string of punitive lawsuits.<\/p>\n

Princeton Professor Harrison Hong and New York University professor Marcin Kacperczyk echoed these findings in their 2007 white paper The Price of Sin: The Effects of Social Norms on the Markets<\/a><\/strong>.\u00a0 The professors found that the taboos associated with investing in politically incorrect industries such as tobacco, alcohol and gaming led these sectors to be priced as perpetual value stocks.\u00a0 Many big institutional investors, such as pension funds and endowments, are prohibited from investing in these industries, which creates attractive pricing and dividend yields for investors with no such restrictions.\u00a0<\/p>\n

Investors should keep in mind, however, that not all sin stocks are created equal.<\/strong><\/p>\n

Other than being collectively shunned by socially-responsible investors, the different categories of vice investments have very little in common.\u00a0 Tobacco and alcohol are both considered defensive consumer staples, whereas gaming stocks are far more cyclical and dependent on the health of the travel and tourism industries.\u00a0<\/p>\n

There is a reason why the Las Vegas casino stocks were not included in the list above of sin stocks making new 52-week highs.\u00a0 MGM Resorts ($<\/span>MGM<\/a>)<\/strong>, Wynn Resorts ($<\/span>WYNN<\/a>)<\/strong> and Las Vegas Sands ($<\/span>LVS<\/a>)<\/strong> have all suffered in recent years due to overcapacity and a tourist dearth.\u00a0 Just this past week, the Nevada Gaming Control Board reported that the state\u2019s gambling revenue fell sharply in May, the last month for which there was data.\u00a0 Revenues on the Las Vegas Strip were down a full 18%.<\/p>\n

But even within the alcohol and tobacco sphere\u2014the \u201cbooze and butts\u201d, if you will\u2014the industry economics are very different.\u00a0 Because of legal restrictions tobacco companies have very limited opportunities to advertise, whereas advertising and marketing are a major expense for spirits companies and are essential to the success of the brands.\u00a0 Half of the pleasure of enjoying a nice scotch is the feeling of quality and exclusivity that the brand projects.\u00a0 And who hasn\u2019t seen the \u201cmost interesting man in the world\u201d commercials and instantly wanted to drink a Dos Equis beer?<\/p>\n

Implications for Investors<\/p>\n

Sizemore Capital is a big believer in vice investing, and Altria and Diageo have been in our portfolios for multiple years.\u00a0 Barring an irrational surge in their prices, these are stocks that I would be content to own forever, and they are a fine addition for any investor looking for current income.\u00a0 But we do not<\/em> currently have any positions in gaming stocks.\u00a0<\/p>\n

The stable consistently that makes booze and butts stocks attractive is not present in the gambling industry.\u00a0 This is not to say that gaming stocks cannot be profitably traded, and at the right price they could certainly be attractive.\u00a0 But these are stocks that should be viewed as short-term trades rather than long-term dividend generators.\u00a0<\/p>\n

Disclosures: Sizemore Capital is long MO and DEO in <\/em>The Sizemore Investment Letter Portfolio.<\/em><\/a>\u00a0 This article first appeared on MarketWatch<\/a>.<\/em><\/p>\n

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