So-called “sin stocks” often provide higher returns. If some investors simply won’t buy a stock for ethical or moral reasons, that in turn lowers the current share price and provides an opportunity for those willing to own that same stock.
It’s possible, though not guaranteed, that sin stock returns will be higher in an era of ESG (environmental, social and governance) investing. As AQR’s Clifford Asness noted back in 2017, the very goal of ESG investing actually is to lower expected returns. That in turn reduces that company’s cost of capital and makes projects more profitable. Conversely, sin stocks have a higher cost of capital, an impediment to the business but somewhat counterintuitively a boost to returns for those willing to invest in those names.
That said, individual sin stocks have much the same risks as the rest of the market. In some cases, the risks are greater given tighter regulation and changing consumer behavior. Altria (NYSE:MO) is a great example: what not that long ago was the greatest stock ever declined over 40% before a recent bounce.
These three sin stocks could follow that same trajectory in a worst-case scenario. And so investors probably should look elsewhere in the group, both during the holiday season and after it.
Boston Beer (SAM)
To be fair, I’ve been wrong on Boston Beer (NYSE:SAM) so far. SAM stock has nearly doubled since I recommended against it nearly two years ago. And there is a lot to like here. Boston Beer’s Truly is a leader in the fast-growing hard seltzer space. The acquisition of Dogfish Head in May added to the beer portfolio. And the flagship brand has a solid reputation and nationwide reach.
Still, I’d be careful, at least, owning SAM stock above $350. Valuation is questionable, at over 30x forward earnings. Overall beer consumption, even for craft beer, is declining on a barrel basis. Wine and spirits are taking share. Hard seltzer could be a growth opportunity — or it could be something of a fad.
There are risks here, and SAM already has pulled back from August highs. I wouldn’t be at all surprised if that pullback extends.
Anheuser-Busch InBev (BUD)
Anheuser-Busch (NYSE:BUD) already has seen its pullback. BUD stock touched a six-year low late last year. Shares rallied from those levels, but have reversed and trade at a nine-month low.
From a near-term standpoint, BUD seems particularly risky. Shares have breached support at $80, and even with some modest rallies in recent sessions there’s room for the stock to give way.
From a long-term standpoint, Anheuser-Busch InBev stock too looks dangerous. At 17.3x forward earnings, BUD stock hardly looks cheap. Sales are declining as craft beer continues to take share in the U.S. A 2.6% dividend yield is attractive, but Anheuser-Busch InBev halved its dividend last year and may cut it again as it tries to manage a significant debt load. An $11 billion asset sale to Asahi (OTCMKTS:ASBRF) has been held up by regulators, a potential stumbling block to reducing borrowings that total roughly $100 billion at the moment.
There are real risks here — and real reasons why BUD stock has pulled back so sharply. It’s not hard to see echoes of Kraft Heinz (NASDAQ:KHC), another company that took on too much debt and then had to deal with significant, secular, changes in its industry. Simply put, Anheuser-Busch is going in the wrong direction right now, and the same likely will hold true for BUD stock.
Canopy Growth (CGC)
To be fair, it’s possible that Canopy Growth (NYSE:CGC) will rally during the holidays and into 2020. As I wrote just last week, “Cannabis 2.0” products have the potential to help revenue next year. The arrival of a new chief executive officer from Constellation Brands (NYSE:STZ,NYSE:STZ.B), who owns over 40% of the company, has sparked hopes for a takeover. CGC stock already has bounced, yet it and other cannabis stocks trade significantly off early 2019 highs.
That said, I’m hardly sold on CGC stock at the moment. A new CEO may help, but execution has been poor for some time now. Pricing pressure in Canada should pressure margins. Barring movement in the U.S., opportunities outside the market still seem limited.
And for investors betting on a cannabis rebound, there are other, potentially more attractive options. Aphria (NYSE:APHA) has done an excellent job this year under CEO Irwin Simon, and looks like the pick in the sector. Cronos (NASDAQ:CRON), like Canopy, has a fortress balance sheet and has avoided wasting capital on potentially unprofitable production assets.
I’m not recommending a short of CGC, or even necessarily that owners sell the stock. But for those who believe the cannabis sector has hit a bottom, there seem to be better places to put new money than Canopy Growth stock.
As of this writing, Vince Martin has no positions in any securities mentioned.