Hate the sin, love the stock.
Yes, I know, I’ve altered the phrase made popular in Mahatma Gandhi’s 1929 autobiography that tells us to love the sinner despite his or her shortcomings. But wouldn’t the same principle surely apply to sin stocks?
While you might hate the personal destruction caused by cigarettes, gambling and alcohol, if you truly believe what Gandhi was saying all those years ago, I would think you would love the companies that produce these products and services. Gandhi would have.
I’m being facetious, of course.
These stocks aren’t for everyone, as is evidenced by the growing number of funds using negative screening to eliminate sin stocks from their portfolios. Dallas-based GuideStone Funds, for example, manages $10.2 billion and is the largest Christian-screened mutual fund family in the country. Its portfolio managers can’t invest in stocks that are in the liquor, tobacco, gambling, pornography or abortion industries.
For instance, GuideStone offers a passively managed fund that approximates the performance of the S&P 500. The only difference is that it excludes companies such as Altria Group Inc (MO) and Wynn Resorts, Limited (WYNN) because of their participation in tobacco and gambling, respectively.
However, over the 10-year period ending Dec. 31, 2015, a $10,000 investment in the index was worth $23,815, while the GuideStone fund delivered $19,574 — 22% less than the index. Granted, some of the difference comes from fees, but considering both MO and WYNN outperformed the index over the last 10 years, the exclusion of sin stocks from the index has clearly led to lower returns for the fund.
I like three sin stocks to buy right now — and they’re all stocks excluded by GuideStone.
Sin Stocks to Buy Now: Brown-Forman Corporation (BF.B)
When it comes to liquor and booze, investors are limited to just three options: Molson Coors Brewing Company (TAP), Constellation Brands, Inc. (STZ) and Brown-Forman Corporation (BF.A, BF.B).
Brown-Forman recently announced it was paying $416 million to acquire BenRiach Distillery, makers of three single malt Scotch brands: BenRiach, GlenDronach and Glenglassaugh. It left the Scotch business a decade ago when it relinquished the U.S. marketing rights to Glenmorangie after 13 years, while also selling its 10% interest in the distillery to Moet Hennessy.
Not a huge acquisition for the $20-billion market cap in terms of total dollars, but crucially important in terms of its ability to compete in the brown spirits category.
Once the acquisition’s complete, it will have whiskey offerings in four different categories: American, Scotch, Irish and Canadian. It’s filled a major hole in its lineup.
From a valuation perspective, all three of the liquor companies mentioned above are fairly valued if not overpriced trading at four to seven times sales. Constellation is the cheapest with a price-to-sales ratio of 4.8.
The Modelo pickup for them has been huge, but given that margins for spirits are higher than beer and the fact that TAP and STZ have been on a tear the past three years compared to BF.B, I’m going with the maker of Jack Daniels.
Sin Stocks to Buy Now: Royal Caribbean Cruises Ltd (RCL)
With gambling we have a bit of a quandary.
WYNN, which is clearly excluded from GuideStone’s passive fund, is considered to be in the Resorts and Casinos industry by Finviz.com, but according to the Global Industry Classification Standard, which is what Dow Jones uses for the S&P 500, it’s in the Casinos and Gaming industry.
What the big deal?
Well, according to Finviz, two other Resorts and Casinos stocks are in the S&P 500: Carnival Corp (CCL) and Royal Caribbean Cruises Ltd (RCL). Under the GICS classification, both of these stocks are considered Hotels, Resorts and Cruise Lines.
You’re still not following?
Both CCL and RCL are held by GuideStone’s fund, despite the fact both cruise lines have casinos on their cruise ships. Thus, they should be excluded from the fund’s version of the S&P 500.
So, for the purposes of this article, I’m going to assume that this is an oversight on the part of GuideStone or the revenue generated from gambling by both companies is considered immaterial to the operation of their business. More importantly, it gives me three choices instead of none.
Which one for me?
As much as I respect Steve Wynn’s business acumen, I’ve got to go with RCL for two reasons. The first has to do with its relative performance so far in 2016. WYNN stock is up 31.8% year-to-date through May 4 compared to a 26.4% decline for RCL. Reversion to the mean suggests I’ve got a better chance with RCL than I do with WYNN, at least for the remainder of 2016.
The second reason has to do with actual business performance. Last week, RCL reported its biggest earnings beat since 2013, Bloomberg reported, while its stock trades at a considerable discount to both CCL and the index itself.
Sin Stocks to Buy Now: Reynolds American, Inc. (RAI)
With Tobacco my choices are limited to three stocks, one of which is MO. Philip Morris International Inc. (PM) and Reynolds American, Inc. (RAI) are the other two.
By no means am I an expert on tobacco stocks, but for me, the job Reynolds American CEO Susan Cameron has done with the company in her two terms as CEO — Cameron ran RAI for seven years until she stepped down in February 2011, only to return in May 2014 — makes RAI stock the best of the bunch.
Cameron’s successor after her first stint, Daan Delen, couldn’t pull off the Lorillard acquisition and so the board hired her back to run the company a second time; within 10 weeks, the two companies had a deal.
Said to be staying on until the Lorillard integration is complete, investors can expect Cameron to move on late this year or early in 2017.
But don’t be concerned. Cameron’s been sure to build a deep bench of talent capable of replacing her.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
