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Beer, Wine or Liquor — The Sin Stock Debate

Which boozy investment will give your portfolio the best buzz?

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Perhaps the stress of the 2011 “mini bear market” has my nerves a little frayed — or perhaps it is the celebrative atmosphere here in Dallas on the potential eve of the Texas Rangers’ first World Series championship getting the better of me — but I find myself thinking a little too much about booze these days.

As an investor, this is not necessarily a bad thing. Alcoholic beverage stocks have had a good run, and most have handily beaten the S&P 500 this year.

There is quite a bit to like about beer, wine and liquor stocks. Like tobacco, firearms, gambling and adult entertainment, booze stocks fall into that stigmatized segment of the market known as “sin stocks.” They also happen to be fabulous long-term investments.

Because of the social stigma of profiting as a purveyor of vice, many high-minded endowments, pension funds and other large institutional investors are prohibited from investing in sin stocks, which tends to keep their price relatively low and their dividends relatively high. This means sin stocks tend to have the characteristics of winning value stocks for those of us with no such moral qualms.

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Figure 1: Vice Fund vs. S&P 500

The proof is in the pudding. While there is no “sin index” for us to use for comparative purposes, the Vice Fund (MUTF:VICEX) comes awfully close. The Vice Fund’s mandate is to invest primarily in tobacco, alcohol, gambling and defense stocks, and over its life it has absolutely crushed the S&P 500.

Vice’s exposure to the gaming industry proved to be a disaster when the economy fell into a tailspin in 2008; had the fund avoided this sector and focused more heavily on booze and smokes, its returns would be off the charts. But even with the routing of the gaming industry, Vice’s 80% return since 2002 is double that of the S&P 500. It’s good to be bad.

So, dear investor, with all of this as background, whadaya drinkin’? Beer, wine or liquor?

Today, I’m going to offer up one stock for each. And while three stocks does not constitute a diversified portfolio, I recommend investors make vice investing a major part of their research process.


In the spirit of World Series baseball, we’ll start with beer. In recent years, the global beer industry has become highly consolidated and now is dominated by just four major players: Anheuser-Busch InBev (NYSE:BUD), SAB Miller (PINK:SBMRY), Heineken (PINK:HINKY) and Carlsberg.

While a case can be made for any of these beer behemoths in a diversified portfolio, my recommendation is the Brazilian regional giant AmBev (NYSE:ABV).

AmBev is owned by the much larger Anheuser-Busch InBev, but it trades separately on the NYSE as an ADR. The company has no net debt, and it absolutely mints money. ABV’s return on equity for the trailing 12 months was an impressive 34%, and its growing its earnings per share at a 20%-per-year clip. Not bad.

Ambev also is a great long-term play on the rise of the South American middle class. As Brazil, Peru and other rising Latin stars continue to develop into modern economies, companies that profit directly from the legions of new middle-class consumers should do quite well. And Ambev, with its dominant position, is poised to profit quite nicely.

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