Sin Stocks: It Feels So Good to Be So Bad
It may not be great to have too many vices. But it sure feels good to profit from them. Enter: sin stocks.
In the following, I will define what sin stocks are. Look at the various sectors under which they fall. And make note of some important ones to watch…
What Are Sin Stocks?
A sin stock is a share of any publicly traded company whose primary business activities are often considered unethical or immoral. For example, many people consider tobacco stocks unethical. Because firms like Altria (NYSE: MO) directly profit from people smoking. Smoking, of course, is bad for a person’s health.
Tobacco is far from the only vice to consider here. Publicly traded companies that engage in selling the items below also tend to be lumped in this category.
- alcohol
- weapons
- gambling
- sex
Investing in sin – “sinvesting”? – is often contrasted with socially responsible investing, or SRI. Socially responsible investors buy stocks that are good for their bank account. But they also have positive and tangible benefits to society.
ESG – or environmental, social and governance – investing is one example of socially responsible investing. One might consider clean energy stocks to be socially responsible. Because they avoid the pollution that comes with more traditional fossil fuels.
Stocks that deal with vice, on the other hand, could be said to have negative consequences for both individuals and society by encouraging addictive, sexual or violent behaviors. Investors that choose to purchase sin stocks must decide they are okay with such business models.
The Philosophical Conundrum
Of course, the very notion of a “sin stock” raises some interesting philosophical questions. Who decides which business models are unethical or immoral?
For example, is it wrong to sell cigarettes to individuals who already know they can cause cancer? People have free will, after all.
Plus, different individuals may come to different conclusions about what is immoral. For example, a vegan may find agricultural products that deal in animal meats are deeply unethical. But most carnivores do not consider such stocks sinful.
Just as individuals can differ in their moral sentiments, whole societies and cultures can differ as well. A business practice or product that Americans find problematic may be just fine with investors in China. And vice versa.
Despite such philosophical differences, there is a core group of businesses that tend to fall under the rubric of sin stocks: gambling, alcohol and tobacco stocks. It is primarily these that we will focus on in the rest of this article.
Why Invest in Sin Stocks?
Given the troubling ethical concerns of sin stocks, why would anyone invest in them? Simply put, people invest in sin stocks because they are often highly profitable.
Companies engaged in “sinful” practices are legal entities with legal business pursuits. An investor may rightfully think, “Who am I to judge what a company does if society allows it to occur?”
Plus, so long as these companies exist, someone is going to be profiting from these opportunities. Why is it better for someone else to be making that money when you could also be profiting?
If sin stocks were bad investments, nobody would buy them. But companies like Altria and Anheuser-Busch InBev (NYSE: BUD) have been pulling in big profits for a long time.
There are several reasons why these instruments can outperform their “morally superior” peers:
- Government Regulations & Taxes
Governments often require businesses to jump through legislative hoops to engage in vice. As a result, government regulations can become significant barriers to entry for competing firms. This results in less competition overall, making business more profitable for the major players.
As with regulation, taxes can be a barrier to entry for vice stocks. Think about the high taxes placed on cigarettes. High taxes drive down the demand for a product, so fewer suppliers are necessary. This means that only the most successful sin companies are going to remain in the market.
- Undervaluation
Analysts and institutional investors sometimes avoid close association with these assets. As a result, sin stocks may not be covered as often and as thoroughly by research analysts. Plus, large institutional investors may avoid them.
This will decrease overall demand for the stock and therefore keep prices low. That gives investors who are willing to engage with these instruments a significant edge.
Just as with any other value stocks, sin stocks can earn you profits when investors pile in as they realize the stocks are trading lower than their intrinsic value.
- Inelasticity
Finally, these stocks can be profitable because they are relatively recession-proof. People tend to keep smoking and drinking when markets turn bad. It’s hard to cut out addictive substances.
In fact, when times are tough, people may even lean more heavily on their vices, protecting the value of these stocks. As a result, sin stocks can be seen as a hedge against an economic recession when stocks that are more sensitive to downturns plummet.
Just as diversification helps prevent against major losses in general, making sure you diversify in both “naughty” and “nice” companies can protect you from downturns in the broader markets.
The Types of Sin Stocks
As previously mentioned, morals are somewhat in the eye of the beholder. Nevertheless, there are some core industries that tend to be lumped into the vice category. And there are many stocks to choose from in each category, including:
Tobacco
- Phillip-Morris International (NYSE:PM)
- British American Tobacco (NYSE: BTI)
- Imperial Brands PLC (OTC: IMBBY)
Alcohol
- Constellation Brands (NYSE: STZ)
- Diageo (NYSE: DO)
- Brown Forman Corporation (NYSE: BF-A, BF-B)
- Caesars Entertainment Corp. (Nasdaq: CZR)
- Melco Resorts & Entertainment (Nasdaq: MLCO)
- DraftKings (Nasdaq: DKNG)
Guns
- American Outdoor Brands (Nasdaq: AOBC)
- Sturm, Ruger & Company (NYSE: RGR)
- Smith & Wesson Brands (Nasdaq: SWBI)
Concluding Thoughts on Sin Stocks
Vice stocks are not for everyone. Everyone must analyze their own moral positions and decide what activities and behaviors they are willing to put money behind.
Nevertheless, for those who wish to take the plunge, investing in sin stocks can be a highly profitable venture indeed. Sometimes it really does feel so good to be so bad.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.