The definition of sin stocks varies by source.
Investopedia defines them as follows:
“A sin stock is a publicly traded company involved in or associated with an activity that is considered unethical or immoral. Sin stocks are generally in sectors that deal directly with morally dubious actions. They are perceived as making money from exploiting human weaknesses and frailties.”
In “The Price of Sin: The Effects of Social Norms on Markets,” professors Harrison Hong and Marcin Kacperczyk state the following about sin stocks:
“[W]e find that sin stocks are less held by normconstrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than stocks of otherwise comparable characteristics,” the duo’s March 2007 academic paper stated.
“Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms.”
- Boston Beer (NYSE:SAM)
- Altria (NYSE:MO)
- Aphria (NYSE:APHA)
- Lockheed Martin (NYSE:LMT)
- MGM Resorts (NYSE:MGM)
- Draft Kings (NASDAQ:DKNG)
- Veru (NASDAQ:VERU)
For this article, I’m going to recommend seven sin stocks from seven different industries, all of them considered less than pure, but profitable nonetheless.
7 Sin Stocks to Buy: Boston Beer (SAM)
It’s beyond me why some people consider a company like Boston Beer to be a sin stock, given prohibition ended 87 years ago, but that’s where we find ourselves today. As a result, the company’s stock is the largest holding in the AdvisorShares Vice ETF (NASDAQ:ACT) with a weighting of 10.22%.
AdvisorShares’ VICE ETF has the following investment thesis:
[I]nvesting in select alcohol and tobacco companies will provide continued growth and long-term performance across all types of market environments. With evolving societal and regulatory landscapes, the upside potential of cannabis as a new investment avenue has emerged to complement the historically resilient characteristics of alcohol and tobacco.
As far as businesses go, Boston Beer has done an exceptional job rewarding its shareholders over the long-term. Over the past 15 years, SAM’s annualized total return is 27.3%, three times the U.S. markets as a whole.
Boston Beer is continuously innovating. First, it was Samuel Adams beer. Then it was Twisted Tea hard iced tea, Angry Orchard cider, and most recently, along with rival White Claw, a producer of spiked seltzer.
The company has a steady free cash flow and minimal debt, which means it can do well in both good and bad economies. It’s been a favorite of mine for many years.
The maker of Marlboro cigarettes reported second-quarter earnings on July 28, and they were much better than analyst expectations.
On the bottom line, Altria delivered earnings of $1.09 a share, three cents higher than the consensus estimate. On the top line, Altria had Q2 2020 sales of $6.37 billion, 3.8% less than last year, but ahead of analyst expectations.
In fiscal 2020, management expects to generate adjusted earnings per share of at least $4.21, perhaps as high as $4.38, a 4% increase over last year.
“With a better understanding of COVID-19 impacts on adult tobacco consumer purchasing behavior and an additional quarter of ABI earnings contributions, we’re reestablishing full-year 2020 adjusted diluted EPS guidance,” Altria chief executive officer (CEO) Billy Gifford stated.
Translation: People are still buying cigarettes in large numbers.
Two areas that could use a little improvement are its investments in Anheuser-Busch InBev (NYSE:BUD) and Cronos Group (NASDAQ:CRON) — it owns 10% of the brewer and 45% of the Canadian cannabis company with an option to buy 10% more — which generated lower returns for the company in the second quarter.
As I stated in May, if you’re betting on America, Altria is a company you can count on to deliver. At the same time it announced its earnings, MO announced a 2.4% annual increase in its dividend from $3.44 a share from $3.36 a year earlier, a yield of 8.4%.
While I recommended Altria, and it controls a cannabis company, I thought I should include a second business that doesn’t have a significant, controlling shareholder.
Aphria reported fourth-quarter results on July 29. On the top line, its net revenues increased 5% from the third quarter to 152.2 million CAD and 18% over a year earlier. On the bottom line, its adjusted EBITDA increased 3,995% over last year to 8.6 million CAD from 209,000 CAD in Q4 2019. The EBITDA increase was its fifth in a row, setting the standard for Canadian cannabis companies when it comes to profitability.
Most importantly, Aphria’s recreational sales in the quarter and year were considerably higher. In the fourth quarter, these sales were 56.7 million CAD, 27% higher than in the third quarter. Its recreational sales for all of 2020 were 150.4 million CAD, 307% higher than in 2019.
Canaccord analyst Matt Bottomley said the growth in adult-use recreational sales “continues to outpace the growth rate achieved by virtually all of Aphria’s Canadian peers.”
PI Financial analyst Jason Zandberg suggested the recreational sales in the fourth quarter were “a home run” and led to increased market share. The analyst upped his target price by 50% to 12 CAD, or approximately $9.25 a share, providing investors with approximately 89% upside.
Since Aphria announced its quarterly results, its stock’s lost 19% of its value. If there were ever a time to buy on the dip, this is it.
Lockheed Martin (LMT)
When one thinks of the name of a weapons manufacturer, Sturm Ruger (NYSE:RGR) or Smith & Wesson Brands (NASDAQ:SWBI) come to mind. However, Lockheed Martin has its fair share of killing machines, including Sikorsky helicopters, F-35 Lightning II Joint Strike Fighter aircraft, air and missile defense systems, and space-related strategic and defensive missile systems.
If you own LMT stock, you have to accept that you’re supporting a company whose products kill human beings. Like owning Altria, if you’re okay with that, LMT is an excellent investment.
Over the past decade, the company’s stock’s generated an annualized total return of 19.3%, 560 basis points higher than the U.S. markets as a whole. Year to date through August 3, it’s not having the best year, down 1.9%, 520 basis points worse than the entire U.S. markets.
That’s okay. It’s proven to deliver over the long haul. Currently yielding 2.5%, it also provides an excellent dividend, allowing investors to be paid to wait for a resurgence in its share price.
On June 15, Marilyn Hewson stepped down as CEO of the company after taking the top job in January 2013. Hewson was the first woman to run the aerospace and defense company. She was replaced by James Taiclet, the former CEO of American Tower (NYSE:AMT).
MGM Resorts (MGM)
The last time I wrote about MGM Resorts was in early July. At the time, I argued that the casino stocks, like the airlines, were best avoided in the near-term. As an alternative, I suggested investors consider the VanEck Vectors Gaming ETF (NASDAQ:BJK) as a way to benefit once casinos did bounce back.
Since my July 3 article, MGM stock has gone sideways.
“With the July 4 weekend coming up, investors should get a better idea of how fast MGM will bounce back. I’m skeptical that people are going to want to be in casinos when Nevada, Arizona, and California are setting record numbers of Covid-19 cases,” I wrote.
“If you can’t make the ETF play to get your MGM exposure, I would wait until the fall before considering buying MGM stock. That’s because another significant correction could be in store for stocks over the next two months. If that happens, stocks like MGM will face further downside.”
On July 30, MGM reported a 91% decline in second-quarter revenues. As a result, it had an operating loss of $1 billion versus a $371 million profit a year earlier.
CEO Bill Hornbuckle told investors that the novel coronavirus and Covid-19 remains a severe headwind on both its U.S. and Macau business.
Long-term, I think MGM is a winner. However, now isn’t the time to be impatient. If you’re willing to hold for 3-5 years, I don’t see a problem buying a little now and waiting to see if it falls into the low teens by the end of the summer.
Once we know the recovery is real, it will quickly move up into the $20s, but that won’t happen until late in the year or into 2021.
Draft Kings (DKNG)
In my quest to recommend seven different sin stocks from seven different industries, I’ve chosen to separate sports betting from the gambling industry. I’ve done so for two reasons.
First, I believe that sports betting is going to be the biggest growth area for casino operators in the years ahead, and while DraftKings doesn’t operate a physical casino, its sports betting and fantasy sports businesses will be prime beneficiaries from a return by professional sports.
In July, I called DKNG stock the best bet among the 37 holdings in the Roundhill Sports Betting & iGaming ETF (NYSEARCA:BETZ). At a weighting of 5%, it is the fifth-largest holding in the ETF. Frankly, it ought to be the largest.
And I’m not the only one who thinks this way. InvestorPlace contributor Louis Navellier’s Portfolio Grader gives DraftKings an “A” rating and calls it a “strong buy.” InvestorPlace’s Chris Markoch recently called DraftKings a sin stock to gamble on. Finally, InvestorPlace contributor Tezcan Gecgil recently included DraftKings in a group of three special purpose acquisition companies (SPACs) worthy of investor consideration.
Every time DKNG stock falls below $30; I would consider buying some of its stock. Long-term, regardless of the headwinds it faces around sports participation, DraftKing looks primed for victory in the world of sports betting and fantasy sports.
Of all the sin stocks on this list, Veru could be the most controversial. However, before someone from the company reads this and sends me a nasty email, let me explain.
On Oct. 31, 2016, The Female Health Company merged with Aspen Pharmaceuticals, creating Veru Healthcare. For slightly less than a year, the merged business traded under the Female Health Company’s FHCO symbol. On Aug. 10, 2017, Veru Healthcare and The Female Health Company became Veru Inc. and traded on the NASDAQ with the symbol VERU.
Veru is two businesses.
The first is an oncology and urology biopharmaceutical company that’s developing medicines for the management of prostate cancer. The company is currently in clinical trials for two oral cancer products — VERU-111 and VERU-100.
The latter is intended to help with advanced prostate cancer. The former has the potential to act as both an antiviral and anti-inflammatory treatment of patients infected with Covid-19 and at high risk for Acute Respiratory Distress Syndrome (ARDS).
What’s so sinful about these medicines? Nothing. It is the company’s commercial sexual health products that might offend some. The Female Health Company has two products.
The first is the FC2 Internal Condom/Female Condom, which protects women from unwanted pregnancies and sexually-transmitted diseases. It is the only internal condom approved by the Food and Drug Administration (FDA). It’s available at no cost through most insurance plans.
The company worked hard to get this product sold in many parts of the world. It’s a vital product for female health.
The second product is Roman Swipes, a 4% benzocaine wipe that significantly reduces premature ejaculation (PE) in men. And while this product isn’t as nearly as important to a man’s health as the FC2 is to women, it’s a serious issue that many men suffer from.
In the first six months of 2020, the company’s commercial products saw revenues increase by 52% to $20.5 million.
It’s not much, but if you’re an aggressive investor, VERU stock could be a diamond in the rough.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.