If you bought USA Mutuals Vice Fund (MUTF:VICEX) at the beginning of the year, you would be pretty satisfied with performance. Well, outperformance, I should say. While the S&P 500 is up a nice 9% and near all-time highs, the VICEX and its motley band of sin stocks has run nearly 15% higher.
VICEX, as the ticker implies, holds a basket of stocks specializing in alcoholic beverages, tobacco, gaming and defense/aerospace industries — commonly referred to collectively as “sin stocks.” This particular mutual fund per its mandate “will concentrate at least 25% of its net assets in this group of four vice industries (but no more than 80% of its net assets in any single industry).”
Though sin stocks are known to be “recession-proof,” based on recent performance, they’re not just good for recessions — they do well during good times too.
However, if there’s one problem with VICEX, it’s the consistently higher-than-category average net expense ratio (1.48% vs. 1.01%, as computed by Morningstar). That means that for every $10,000 you spend, $148 of it is getting eaten by fees, lowering your overall returns significantly over time. Plus, it has fairly low income, at just 1.2%.
My suggestion? Invest in some of the VICEX’s best ideas. Here are the seven best sin stocks from the Vice Fund:
The Best Sin Stocks From Vice Fund: Altria (MO)
Altria Group Inc (NYSE:MO) remains the standard-bearer of Big Tobacco. It is a consistent performer — up 137% over the past five years to beat the S&P 500’s 91% — a serial dividend raiser that yields more than 3% right now, and trades at a very reasonable 10 times earnings.
Altria is an outstanding company that, despite an increasing push against tobacco products, is able to maximize the value of iconic brands such as Marlboro, Virginia Slims, Benson & Hedges, Merit, Parliament and L&M. Additionally, Altria maintains a 10% stake in Anheuser Busch Inbev NV (ADR) (NYSE:BUD), which owns similarly iconic beer brands Budweiser, Corona and Stella Artois.
Cash flow-rich as it is, Altria is not content to just sit at the helm of the status quo. No resting on laurels here. It is truly innovating with its partner, Philip Morris International Inc (NYSE:PM) — which it spun off in 2008 — in the reduced-risk smokeless category. The future is bright for distribution and usage of these products in the U.S.
As smokeless products rise in popularity, especially among health organizations that see this as a better alternative, Altria will be a main beneficiary as it scales. Given a long history in this business, MO has long had strong relationships with government agencies and would be a logical go-to partner as these products enter the market en masse.
The Best Sin Stocks From Vice Fund: MGM Resorts (MGM)
MGM Resorts International (NYSE:MGM) has had a great run from the beginning of 2016, up more than 50%. Execution on plans to reduce leverage and monetize the value of its real estate, have led this growth in share price.
So, the stock isn’t as cheap as it once was, but there still remains opportunities to grow especially in China and unlocking further real estate value.
MGM Resorts owns roughly 56% of MGM China Holdings Ltd, which they increased their stake in last September. There remains huge opportunities in the region, specifically Macau. Later this year, the intention is to open MGM Cotai on the prime casino Cotai Strip (the equivalent of the Las Vegas Strip) in Macau.
Property EBITDA margins are soaring at more than 30%, and brand expansion is underway with MGM National Harbor, MGM Springfield and Porto Island in Dubai on the horizon. The completion of these properties may already be baked into the current share price, but I can see additional upside as MGM identifies new projects that will be accretive in the near-term and getting to investment-grade — a goal that management has had a renewed focus on.
The Best Sin Stocks From Vice Fund: Philip Morris (PM)
I wouldn’t be too concerned about the first-quarter bottom-line miss and meager top-line growth. Some argue that Philip Morris International Inc (NYSE:PM) is losing steam, but management has indicated that meeting full-year EPS guidance won’t be an issue.
The decline in global cigarette unit volumes had me looking twice. After all, we’re not talking about a couple percent variance, but 11.5%. This is where Philip Morris’ investments in the smokeless segment come into play. More than any other cigarette company, PM has been innovating in smoke-free products. And those products are taking off in countries where they’ve been selectively rolled out. Q1 numbers showed unit shipment volume up significantly as additional capacity came online.
Earlier this year, management announced a €300 million smoke-free product manufacturing facility in Greece with an annual capacity of 20 billion tobacco sticks. Philip Morris’ regional EU president commented:
“This investment is further evidence of our progress towards a smoke-free future. We are encouraged by the 1.4 million smokers who have already switched to IQOS around the world, and we expect this momentum to continue. This facility will help enable us to meet growing demand from adult smokers.”
Naturally, a ramp-up period is to be expected as PM makes additional investment to commercialize and expand the heated tobacco unit.
Make no mistake, smokeless is the future. Company projections expect an installed production capacity of 100 million units by the end of next year. After future earnings show meaningful growth and traction with the new heated tobacco products and more certainty around the contribution to cash flows, PM stock will keep moving upward.
The Best Sin Stocks From Vice Fund: American Outdoor Brands (AOBC)
Effective Jan. 1, Smith & Wesson Holding Corp completed its rebranding to American Outdoor Brands Corp (NASDAQ:AOBC). AOBC has changed its “holding company name to better reflect (its) expanding strategic focus on the markets for shooting, hunting, and rugged outdoor enthusiasts.” So, while firearms sold under the No. 1 firearms brand in America, Smith & Wesson, will still be a core part of the business, AOBC is expanding.
AOBC’s commitment to a new strategic direction should ensure solid long-term growth prospects. Within VICEX, it sports the lowest P/E at just shy of 10x. Given the nature of the business, a lower overall P/E is difficult to break out of, but the new approach, if executed well, could warrant a ratchet up from the market.
The four focuses are: diversifying revenue via acquisitions of counter-seasonal businesses, harvesting synergies from current and future divisions, leveraging manufacturing capabilities, and satisfying customers in a way that will keep them coming back for the cross-sell. The Crimson Trace acquisition in August 2016 is a great example of the new direction that will make AOBC a stronger competitor across verticals beyond just firearms.
The board of directors also recently authorized an additional $50 million for stock repurchases through March 28, 2019: “Between 2012 and 2017 the company has purchased a total of 16.9 million shares of its common stock at an average price of $12.67, reducing its float as a result of share repurchases by 25.6%.”
That’s pretty astounding, and as the company continues to reduce float, the share price has a guaranteed support.
The Best Sin Stocks From Vice Fund: Wynn Resorts (WYNN)
No one knows casinos and resorts like Steve Wynn, CEO of Wynn Resorts, Limited (NASDAQ:WYNN) and the veritable pioneer in integrated resorts. Just go to Las Vegas and take a walk around his eponymous Wynn Las Vegas. Luxury and opulence aside, what it oozes is money. And that’s what investors care about. It is top dog in net revenue across all integrated resorts in Las Vegas.
A year after the Wynn Las Vegas opened in 2005, Wynn Macau opened its doors to a newly wealthy class of Chinese gamblers. It’s still illegal to gamble on the mainland, so Macau is a close option (the flight is less than three hours from Shanghai). With 1,000 rooms and suites and 60,000 square feet of high-end retail, Wynn was the first truly integrated resort on the peninsula. Unsurprisingly, it’s the best performer there, generating 260% EBITDA Fair Share based on public company filings for the LTM period ended September 30, 2016.
The Wynn Palace Cotai on the Cotai Strip opened for business last year. It’s more opulent than the Wynn Macau, and in fact is the expensive hotel in the world. Early performance indicators are promising, though a few more quarters of data will give a more complete picture.
The bottom line is that Steve Wynn is a visionary with 40 years in the gaming industry business. An investment in Wynn is an investment in him. The past 40 years have proven that a dollar in one of his casinos is practically a sure bet.
The Best Sin Stocks From Vice Fund: British American Tobacco (BTI)
Once the Reynolds American, Inc. (NYSE:RAI) deal is officially closed during the third quarter this year, any overhangs on British American Tobacco PLC (ADR) (NYSEMKT:BTI) stock should clear. Then the sky is the limit for the combined entity.
BAT already owns 42% of Reynolds, so the $49.4 billion takeover is for the remainder of the owner of Camel and Newport brands. This deal gets BAT back into the highly profitable though also highly regulated U.S. market. This was not an easy deal to strike, taking four tries until Reynolds accepted the terms.
British American on a standalone basis already has a strong portfolio of global brands. Its top five leading tobacco brands are Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans that have increasingly become an important basis for growth. Last year, they accounted for 49% of all the cigarettes BTI sold, up from 32% in 2011.
Despite global cigarette volume declining year-over-year, BTI has managed to increase overall market share in its key markets — 50 basis points in 2016 — given continued strong performance by its portfolio. The addition of Camel and Newport brands will enhance its global offering and allow BAT to be more competitive both inside and outside of the U.S.
Synergies may not materialize until early next year, so it’s worth getting in before the deal closes and the market gives BAT credit for this transaction.
The Best Sin Stocks From Vice Fund: United Technologies (UTX)
United Technologies Corporation (NYSE:UTX) is a diversified industrial conglomerate that provides high tech products and services to the aerospace industry and commercial buildings. Pratt & Whitney ($15 billion in 2016 sales) and Otis ($12 billion in 2016 sales) are a couple of their better-known brands, though it’s the Climate, Controls, and Security side of the business that rakes in the most revenue ($17 billion last year).
Company projections of organic sales growth through 2020 are in the mid-single digits across all platforms except Pratt & Whitney, where growth of over 10% is expected with most of this growth coming from the backlog in the large commercial engine category.
I don’t see massive growth at UTX, since with projected 2017 revenue of $57 billion to $59 billion, it gets harder and harder to move the needle. But the fundamental underlying business continues to grow on its own, and management is committed to returning at least 90% of free cash flow generated to shareholders.
UTX represents a true sin stock. It will do in times of peace, in times of war and in times of economic contraction. Its global franchises dependably generate large amounts of cash, which is exactly what you expect and want from this type of investment.
As of this writing, Luce Emerson was long MO.