This is no ordinary year. Analysts are debating potential effects of a second wave of the novel coronavirus pandemic on our economy. If you’re worried about recession-proofing your portfolio to protect from another economic slowdown, one possibility are sin stocks.
This niche part of Wall Street typically refers to shares in the gambling, tobacco, cannabis and alcohol industries that are seen as relatively recession-proof.
Recent research by Stefano Colonnello of Goethe University highlights that “investments in companies involved in activities commonly perceived as sinful … are, on average, more profitable than investments in companies of comparable size but operating in sectors that are not considered sinful. … With a lower demand for sin stocks, investments in boycotted companies carry higher risk and, therefore, higher return (‘sin premium’).”
As we enter a new earnings season, volatility has once again increased in broader markets. And market participants are looking for industries that may do well in the coming months. Revenues tend to be more stable for sin companies since their businesses are considered to be recession-proof. You can do this by picking individual stocks or an exchange-traded fund.
I have chosen one sin stock or ETF from the gaming, cannabis, and alcohol industries that may be able to offer heavenly returns in the rest of the year. They include:
- Constellation Brands (NYSE:STZ)
- Las Vegas Sands (NYSE:LVS)
- ETFMG Alternative Harvest ETF (NYSEARCA:MJ)
Sin Stocks: Constellation Brands (STZ)
52 Week Range: $104.28-$212.00
New York-based Constellation Brands manufactures and markets a wide range of alcoholic beverages including beers, wines, and spirits. Its brand portfolio includes beverages such as Corona, Modelo, Casa Noble, Svedka. Constellation Brands is No. 402 on the Fortune 500 list and one of the top 10 beer manufacturers globally.
STZ released first-quarter earnings on July 1. Revenue came at $1.96 billion, a YoY decrease of 6%. Adjusted earnings per share of $2.30 was much higher than analysts’ expectations for $2.01.
The company generated $687 million of operating cash flow and $542 million of free cash flow, a year-over-year increase of 16% and 24%, respectively. CFO Garth Hankinson suggested that Constellation Brands would continue to focus on reducing its debt levels. The board also declared quarterly cash dividend of 75 cents per share. The current yield stands at 1.6%.
During the quarter, Constellation Brands acquired Empathy Wines. The move is in line with management’s aim to strengthen the company’s position in the direct-to-consumer and e-commerce markets within the wine and spirits category.
Investors overall cheered the results, especially considering the fact that the company’s most popular brand, Corona, is produced in Mexico, which observed an especially strict Covid-19 lockdown until late May.
Regular InvestorPlace readers would remember that Constellation owns 38.6% of Canada-based marijuana company Canopy Growth (NYSE:CGC). Constellation’s share of Canopy Growth’s equity earnings and related activities for the quarter totaled a loss of $377.6 million on a reported basis and a loss of $31.7 million on a comparable basis. Shareholders are still hopeful that Canopy Growth’s THC-infused beverages will add to Constellation’s bottom line in the coming quarters.
If you are looking for a sin stock in the alcohol industry, STZ stock clearly deserves your attention. Year-to-date it is down about 2.5%, flirting with $185. You may consider buying the dips, especially if the shares go toward $175 or below.
Sin Stocks to Buy: Las Vegas Sands (LVS)
52-week Price Range: $33.30-$74.29
The pandemic has hit the hospitality, resort and casino businesses hard. Since the lows seen in mid-March, casino developer and operator Las Vegas Sands is up over 30%. Yet despite the recent move up, the shares are still off 28% on a year-to-date basis.
LVS owns and operates several resorts in the U.S. and Asia, including the Venetian Resort and Sands Expo in Las Vegas and the Marina Bay Sands in Singapore. Through majority ownership in Sands China Ltd., Las Vegas Sands also operates several properties on the Cotai Strip in Macao as well as on the Macao Peninsula.
Starting in February, management had to eventually close to all of its venues worldwide. Operations in China are now open and the U.S. venues are slowly returning to normal. Yet it will likely take some time before guests return to these venues. In case of a second wave of the outbreak, LVS stock’s recovery may take longer than initially anticipated.
Markets are cyclical and there may still be some pain for LVS stock. However, it is one of the leaders in the industry. Long-term shareholders would remember that when casinos were open year-around in previous quarters, it had high margins and strong cash flows.
Risk-tolerant investors researching sin stocks in the gambling industry may want to roll the dice and add the shares at the discounted price.
ETFMG Alternative Harvest ETF (MJ)
52-week Price Range: $8.81-$31.59
If you are interested in investing in cannabis stocks, you may want to take a closer look at the ETFMG Alternative Harvest ETF. It is a marijuana-themed fund that has over half a billion in assets under management.
It seeks to provide investment results that correspond to the total return performance of the Prime Alternative Harvest Index, which tracks the performance of U.S. and global companies that are engaged exclusively in legal activities involving cannabis for medical or non-medical purposes.
Many of the stocks in the ETF are headquartered in Canada. North of the border, marijuana has been legalized for medical use since 2001 and recreational use since 2018. Around 2018, a large number of pot firms entered the space and followed a “growth-at-any-price” approach. At the time, the initial hype around legalization pushed almost all of these sin stocks to highs that are not likely to be seen again. In September 2018, MJ stock reached an all-time high of $45.40.
Starting with early 2019 came the bursting of the bubble in the industry. And investors in pot stocks now better realize that earnings and profitability matter. As investor sentiment shifted from euphoria to impatience and anxiety, prices of these sin stocks, including the MJ fund, plummeted.
Investors will need to follow developments in the industry closely to evaluate the appropriateness for marijuana stocks for their portfolio. At the federal level, marijuana is illegal in the U.S. However, at the state level, its legal status depends on the laws of the individual state.
If there were to be a federal legalization in the U.S., share prices of pot stocks will likely push a lot higher, but that legalization may still be years away. For now, cannabis is an agricultural produce whose use is mostly limited to Canadian recreational buyers.
So far in the year, MJ stock is down over 23%. If you believe the declines seen in the sector since late 2018 have brought these sin stocks to attractive levels, then you may want to consider buying the ETF.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.
