[Editor’s note: “5 Sin Stocks to Buy to Profit From Pent-Up Desires” was previously published in May 2020. It has since been updated to include the most relevant information available.]
In today’s uncertain stock market, should you consider “sin stocks?” I’m talking about stocks in the alcohol, gambling and tobacco industries. And while these industries have their respective controversies, there may be good reason to consider them strong buys. Sure, they aren’t “socially responsible.” Yet, what these stocks lack in terms of “good behavior,” they more than make up for in delivering shareholder value.
How so? Firstly, consistent-cash flow generation. This means high dividend payouts, making them a great choice for a income investor’s portfolio. Secondly, they are typically recession-resistant. In tough times, people don’t cut back on their vices.
Thirdly, today’s unique circumstances could mean decent upside in sin stocks in the near-term. The novel coronavirus has kept millions stuck at home. In other words, a captive audience for alcohol and cigarette sales.
Granted, forced closures of casinos hasn’t been good for gambling stocks. Neither has the hiatus in sports, curtailing America’s burgeoning sports betting market. Yet, there’s plenty of pent up desire among gamblers from coast-to-coast. That said, expect this industry to rebound with a vengeance.
So, which these factors in mind, what are some top sin stocks to buy? Here are five names to consider:
- Altria Group (NYSE:MO)
- Constellation Brands (NYSE:STZ)
- Diageo (NYSE:DEO)
- MGM Resorts (NYSE:MGM)
- Molson Coors (NYSE:TAP)
These five names offers both healthy dividend yields, along with beaten-down share prices due to the pandemic. In other words, potential for gains in the short-term and long-term. Therefore, as the coronavirus winds down, consider now a great time to buy these names ahead of Americans “returning to normal” and all that entails.
Sin Stocks to Buy: Altria Group (MO)
Altria Group may not be a household name, but you’re probably familiar with their flagship business — Phillip Morris USA. The producers of America’s top cigarette brand, Marlboro, Altria has been one of the most controversial stocks out there. And one of the most lucrative ones to own.
In the past few decades, MO stock has delivered above-average returns for investors. Partially due to the company’s high-margin business, which has resulted in consistent cash flow for dividends. But also, multiple expansion as the tobacco industry settled its legal liabilities.
With this in mind, you may think its too late to ride the big tobacco train. However, as Altria has dipped from above $50 per share in January to around $38.50 per share today, it may be a strong buy on the pullback.
For one thing, MO stock now sports a high 8.7% dividend yield. This may mean investors are skeptical of the tobacco industry’s future prospects. However, this high-yield may be more than enough to counter these risks.
Also, the company has exposure to another growing “sin” industry. Through the company’s investment in pot stock Cronos Group (NASDAQ:CRON), they could see additional upside if marijuana legalization continues in the United States.
Put it all together, and MO stock should be top of mind for any sin stock portfolio.
Constellation Brands (STZ)
Purveyors of Corona and Modelo beers — along with Robert Mondavi wines — this adult beverage giant is another solid choice for a sin stock portfolio.
Sure, the pandemic has hurt this business a bit. Between bars and outdoor venues being closed, and supply issues from its Mexican beer brands, there’s a good reason why STZ stock hasn’t bounced back to their 52-week highs.
Yet, this recent pullback may give you a strong entry point. Shares should bounce back once the pandemic is in the rear-view mirror. Also, like Altria, Constellation offers you exposure to the marijuana legalization trend.
Through the company’s large investment in Canopy Growth (NYSE:CGC), STZ stock could see tremendous upside if cannabis legalization extends from Canada over to the United States. Offering a modest dividend of 1.9%, you can get paid while you wait for this catalyst to take off.
Sure, buying pot stocks directly may offer greater potential gains. But with the relatively-stable liquor business backing it up, consider STZ stock a cautious way to play that trend.
A global beer and spirits purveyor, think of DEO stock as a fully-stocked bar. With a rich portfolio of brands, including Johnnie Walker, Smirnoff and Guinness, they hold a commanding share of the top-shelf liquor market. Liquor sales have seen a boost thanks to the lockdowns. But a short-term bump-up in sales isn’t the only reason to consider this alcohol giant a buy.
Firstly, buying liquor stocks in a downturn can be a strong entry point. While alcohol is seen as a recession-resistant industry, premium purveyors like this company do see hiccups from a recessionary environment. However, given their resilience relative to more cyclical industries, buying on these dips may be a shrewd move.
Also, DEO stock sports a decent 2% dividend. Sure, not as “high-yield” as say Altria stock, but it’s still a solid choice in today’s low-interest environment. To top it all off, the long-term growth trajectory for premium spirits remains strong.
As this Seeking Alpha contributor recently noted, the total addressable market for spirits could grow by $550 million this decade. Continued growth in developing economies is a trend that’s a friend to this company’s premium liquor business.
With shares trading more than 25% below their 52-week high, DEO stock could be a solid rebound play as the globe gets over the coronavirus.
MGM Resorts (MGM)
Coronavirus lockdowns mean casinos have been sitting idle. However, that doesn’t mean its time to avoid gaming stocks. Casino foot traffic won’t return to prior levels for quite some time. Yet, with millions of die-hard gamblers getting the itch to hit the tables, we could see a quicker rebound than in other hard-hit industries.
This factor makes MGM stock a strong buy as “shelter-in-place” winds down. Investors have already heeded the call, with major gaming stocks rallying in recent weeks. But don’t take that to mean the party’s over in terms of upside.
Uncertainty continues with casino stocks. It’s still unknown how quickly casinos on the Las Vegas strip will reopen. Also, who’s to say whether plans to ensure safety won’t result in reducing gaming volume?
That being said, MGM stock could be another great sin stocks name to buy on a downturn. Getting in while the industry struggles, shares could skyrocket to prior levels once things return to the high-water mark.
Molson Coors (TAP)
With stadiums and bars closed, the beer industry isn’t exactly in a strong place right now. But, again, that could mean a great time to buy beer names. In a recent article, I discussed how Anheuser-Busch (NYSE:BUD) may be a great bottom-fisher’s buy at today’s prices. However, TAP stock could be another solid choice.
The makers of Coors, Mille and other popular beer brands, Molson Coors is facing some earnings hiccups from the pandemic. Closed public venues means a significant revenue hit, even as pandemic stockpiling helped temporarily boost at-home consumption sales.
Yet, like with BUD stock, today’s tough times for brewers may mean a solid entry point for TAP stock. Shares trade at an extremely low forward price-to-earnings (P/E) ratio of 11.3. With a strong 6.86% dividend yield, get paid while you wait for shares to rebound.
All in all, it may be Miller time for your portfolio when it comes to TAP stock. Consider it a buy as shares trade more than 40% below their 52-week high.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.