While some investors may abhor the idea of putting in money into “sin stocks,” this sector is known for providing stable income despite economic downturns. The products or services in this space are relatively inelastic and the businesses are almost recession-immune, while less competition ensures higher margins and solid profits.
And why not? Tobacco, alcohol and gambling are all habit-forming products and activities, while weapons are still much in demand. But before we head towards picking stocks from this tempting space, let’s take a look at what’s in store for these companies this year.
Great Tobacco & Alcohol Picks
The U.S. tobacco industry has had a solid run over the last few years, 2016 being no exception. Major tobacco stocks including Altria Group Inc (MO) and Reynolds American, Inc. (RAI) delivered a combination of significant dividend income and capital appreciation that helped them post double-digit average annual total returns last year.
2017 could be another compelling year for such companies, as it is likely to see continued interest in dividend stocks. While Altria and Reynolds pay 3.6% and 3.3% yields right now, respectively, the tobacco industry is focusing on reducing risky products.
The industry’s intention to head toward products other than traditional cigarettes may in turn bode well. Needless to say, last year saw big election wins for marijuana in several states. Marijuana sales will add to the government’s exchequer while contributing toward widespread medical use.
The alcohol market in the U.S., in the meantime, has expanded significantly over the past few years on strong demand. The alcohol beverage industry in the U.S. is responsible for sustaining more than 4 million jobs and generating almost $70 billion in annual tax revenues.
We note that the spirits and wine market is benefiting from favorable demographic trends. Baby-boomers and Generation X are reaching peak spirits and wine consuming ages as they reach their 50s and 60s in the U.S. Younger generations are also consuming more spirits (read more: Diageo Upgraded to Hold Owing to Spirits Category Growth).
Gambling Stocks Make Attractive Buys
The gambling space is also recovering and is at the cusp of a strong cycle ahead. The president and CEO of the American Gaming Association, Geoff Freeman has said that “increased mainstream acceptance of gambling, combined with the results of the presidential election, represent an opportunity to push key goals for the industry on a wide range of issues, including regulations and sports betting.”
The Trump administration is expected to be huge for the industry, with Goldman Sachs Group Inc (GS) identifying Las Vegas Sands Corp. (LVS) and MGM Resorts International (MGM) as its top two picks in the said sector. Goldman expects an uptick in infrastructure spending and opening of more resorts under the present regime to eventually propel revenues.
Defense Stocks May Fly Higher
When it comes to defense, increase in uncertainty and the rising need to safeguard the interest of nations and people have boosted demand for weapons. U.S. Defense Secretary Ash Carter unveiled the fiscal 2017 defense budget, which seeks a boost in funding for the fight against ISIS. The budget requests for a fund of $11 billion for the Department of Defense and the Department of State to continue to hunt down terrorists, especially those from ISIS.
The proposed budget also seeks to enhance spending in several key areas, including cybersecurity, electronic warfare and increased security for crucial U.S. satellites. The fiscal 2017 budget proposal has asked for $19 billion for cyber security across the U.S. government, an increase of $5 billion over fiscal 2016. Moreover, a Republican President and Republican control of both the Senate and the House of Representatives increases the chances of passing a defense spending bill.
Top 5 Sin Stocks for Your Portfolio
As mentioned above, sinful stocks are well poised to gain traction this year. Such stocks not only celebrate good times but are also useful during recessionary periods.
We have selected five solid stocks from the tobacco, alcohol, gambling and defense industries. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of ‘A’ or ‘B.’ Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics.
Such a score allows you to eliminate the negative aspects of stocks and select winners…
Constellation Brands, Inc. (STZ) produces, imports, and markets beer, wine and spirits in the U.S.
Constellation Brands has a Zacks Rank #2 and a VGM Score of ‘B.’ The Zacks Consensus Estimate for its current year earnings increased 0.6% over the last 60 days. In the last one-year period, the company has given a return of 3%.
Monarch Casino & Resort, Inc. (MCRI), through its subsidiaries, owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, NV; and the Monarch Casino Black Hawk in Black Hawk, CO.
Monarch Casino & Resort has a Zacks Rank #1 and a VGM Score of ‘B.’ The Zacks Consensus Estimate for its current year earnings soared 7.9% over the last 90 days. For the last year, the company has a return of 12.6%.
Churchill Downs, Inc. (CHDN) operates in six segments: Racing, Casinos, TwinSpires, Big Fish Games, Inc. (Big Fish Games), Other Investments and Corporate. The Casinos segment owns and operates Oxford Casino, Riverwalk Casino, Harlow’s Casino and Calder Casino.
Churchill Downs has a Zacks Rank #2 and a VGM Score of ‘B.’ The Zacks Consensus Estimate for its current year earnings increased 3.6% over the last 90 days. In the last one year, the company has returned an average of 5.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Huntington Ingalls Industries Inc (HII) engages in the designing, building, overhauling and repairing of ships, primarily for the U.S. Navy and the U.S. Coast Guard. The company is the designer, builder and refueler of nuclear powered aircraft carriers, while it also designs and builds nuclear-powered submarines.
Huntington Ingalls has a Zacks Rank #2 and a VGM Score of ‘B.’ The Zacks Consensus Estimate for its current year earnings advanced 0.4% over the last 60 days. Over the last year, the company has given a return of 54.2%.
Engility Holdings, Inc. (EGL) provides integrated solutions and services for the U.S. government, supporting customers throughout defense, federal civilian and international communities. The company also provides information technology modernization and sustainment services including cybersecurity.
Engility Holdings has a Zacks Rank #2 and a VGM Score of ‘A.’ The Zacks Consensus Estimate for its current year earnings improved 0.6% over the last 60 days. In the last one-year period, the company has given a return of 4.2%.
Where Do Zacks’ Investment Ideas Come From?
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