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 take stock of some important ones to watch.

A woman’s hand holding a red apple against a smokey red backdrop.

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:

  • alcohol
  • weapons
  • gambling
  • sex

also tend to be lumped in this category. 

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 that such items 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 that agricultural products that deal in animal meats are deeply unethical. But most of us 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. Or the Middle East. 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 shall be focusing 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 be doing so as well?

If sin stocks were bad investments, nobody would buy them. But companies like Altria (the parent company of Marlboro manufacturer Philip Morris) and Anheuser-Busch InBev (NYSE: BUD) – the maker of Budweiser and other beers – have been pulling in big profits for a long time.

There are several reasons why these instruments can outperform their “morally superior” peers:

  1. 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 the 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 to compete for this market.

2. 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 refrain from investing in them.

This will decrease overall demand for the stock and therefore keep prices lower than they should be. 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 when they realize the stocks are trading lower than their intrinsic value.

3. 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. These include:

  • Tobacco
    As everyone knows, smoking can make you very sick and even kill you. Despite the overall decline in smoking through the decades, there are still plenty of smokers out there.

    As a result, companies like Altria are still pulling in profits and present a potentially lucrative opportunity. 
  • Alcohol
    Alcohol is problematic if one becomes addicted or drinks irresponsibly. This can cause both emotional and physical health problems and even death.

    Nevertheless, drinking is still one of the most popular pastimes in America and throughout much of the world. So while everyone’s at the bar having fun, why not have some fun pulling in profits?

    Mass-brewed beers like Budweiser and Coors may be somewhat on the decline, but the craft beer industry is still booming and presents plenty of opportunity. Firms like Constellation Brands (NYSE: STZ) can help you diversify internationally as well, as they rely on imports of brands like Corona, Pacifico and Modelo. Another stock to watch is Diageo (NYSE: DEO), which produces and markets everything from Johnnie Walker scotch to Tanqueray gin, as well as my personal favorite, Guinness stout beer.

  • Gambling
    Sin stocks aren’t just fun and games – except when they are, as with gambling stocks. Of course, gambling can be addictive and can lose players big bucks in just the flip of a card or the roll of the dice.

    Nevertheless, the house isn’t stacked against you when you invest in gambling stocks. Caesars Entertainment Corp. (Nasdaq: CZR) operates such famed gambling resorts as Harrah’s, Caesar’s, and Horseshoe Hotels and Casinos, and is one such potentially profitable stock. And when it comes to sin stocks, don’t just think Sin City. Melco Resorts & Entertainment (Nasdaq: MLCO) operates several resorts in the Asian gaming capital of Macau. Macau is the biggest gambling locale in the world and the only place in China where gambling is legal.

Taking a flyer on either of these stocks can have you coming up aces, so definitely keep an eye on them.

  • Gun Stocks
    Whether or not gun stocks are truly sinful is certainly up for debate. While many people blame violent crime on a lack of regulation in the gun industry, gun ownership is inscribed in the Constitution and can be seen as a fundamental American right. Plus, most people with guns are law-abiding citizens.

    Unlike tobacco and alcohol, gun stocks can be particularly sensitive topic in today’s political climate. But two gun stocks to watch, if you are interested in this sector, include American Outdoor Brands (Nasdaq: AOBC), which owns the legendary gun brand Smith and Wesson, as well as Sturm, Ruger (NYSE: RGR).

Concluding Thoughts on Sin Stocks

Vice stocks are not for everyone. Each individual 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.

– Brian M. Reiser,
Investment U Contributing Writer

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