Sin stocks are those that cater to vices and bad habits. We’re talking about drinking, smoking, gambling and firing guns. Activities that some people indulge in and enjoy — and that others view as morally questionable.
As the economy gradually reopens and consumers begin to spend again, they will no doubt use some of their money on sin. And spending on vices is big business.
A survey found that Americans spend, on average, $2,400 per year on alcohol, tobacco and gambling. That is no small sum of money!
With this in mind, we will look at the stocks of seven companies that peddle in sin. Park your judgement at the door and read on to learn about stocks that are likely to deliver sinfully good returns in the months and years ahead.
- Constellation Brands (NYSE:STZ)
- Canopy Growth (NYSE:CGC)
- Philip Morris (NYSE:PM)
- DraftKings (NASDAQ:DKNG)
- MGM Resorts (NYSE:MGM)
- Smith & Wesson (NASDAQ:SWBI)
- Vitium Global Fund (MUTF:VICEX)
Sin Stocks: Constellation Brands (STZ)
Constellation Brands is undergoing a radical transformation. Over the last few years, the company has ditched several unprofitable wine brands, made big investments in recreational marijuana companies such as Canopy Growth, and purchased a number of popular imported beer brands such as Corona.
The moves, while disruptive, have given sales a big boost. They also added 10 percentage points to the bottom line. For its fiscal 2020 year, Constellation Brands posted an industry-leading 8% sales increase. It also announced plans to push even more aggressively into premium alcohol categories, especially nontraditional drinks such as hard seltzer.
Going forward, Constellation Brands should continue firing on all cylinders. Its Canopy Growth investment alone gives the company access to an industry that management estimates will be worth more than $250 billion by 2035 — including a $100 billion of annual sales in the United States.
The positive momentum has been reflected in STZ stock, which has risen 81% from a March low to its current price near $190. This is one sin stock that should continue treating investors very well.
Canopy Growth (CGC)
Speaking of Canopy Growth, the marijuana company, which is the largest in the world, has not had an easy go of it. On Sept. 4, the company announced another series of staff reductions as it tries to right size its operations and achieve profitability.
To date, achieving profitability has proved elusive for a number of reasons, ranging from high taxes to the persistent popularity of the black market. Earlier this year, the company reported a 1.3 billion CAD loss for its fiscal fourth quarter, announced the layoff of 500 staff members and closed two of its largest greenhouses where it grows marijuana.
Despite the turmoil, things are starting to look up for Canopy Growth and the rest of the legal marijuana market. On Aug. 31, Statistics Canada reported that spending on legal cannabis outpaced the black market for the first time ever during the second quarter. In a major milestone for the licensed pot industry, spending on recreational cannabis reached 648 million CAD in the second quarter of 2020, an increase of 74% from the same period last year.
At the same time, Canadian household spending on illicit cannabis fell to a new low of 785 million CAD. Taken together, the legal market now accounts for 50.5% of all cannabis-related spending in Canada. Two years after Canada fully legalized recreational marijuana use across the country, the industry is finally stabilizing and growing sales.
With all the drama, CGC stock has been volatile this year. It has more than doubled from a March low of $9.73 a share before falling back to its current level of $16.30. Investors should look for Canopy Growth stock to stabilize in coming months and gradually move higher. Consider the current share price an opportunity to go bargain hunting.
Sin Stocks: Philip Morris (PM)
Of all the sin stocks, tobacco companies tend to have the hardest time. Few sectors are more vilified than Big Tobacco, except maybe gun manufacturers. Yet there is a lot to like about Philip Morris from a business perspective.
Today, Philip Morris generates nearly all of its sales outside the United States. The company is focused on selling its cigarettes, which include the Marlboro brand, in countries with higher smoking rates, lower taxes and fewer restrictions on tobacco use and advertising. In recent years, Philip Morris has raised its prices and cut costs to offset declining smoking rates and cigarette sales. It has also repurchased its own shares to boost earnings and successfully diversified away from cigarettes with newer iQOS devices that heat up sticks of tobacco instead of burning them.
In the first half of this year, Philip Morris’ revenue dropped 0.5%, but its adjusted earnings per share (EPS) rose 8%. In 2021, Wall Street expects the company’s revenue and earnings to grow 7% and 10% respectively as the pandemic passes, retailers reopen and it continues to expand its higher-growth iQOS business. Analysts forecast that the company should generate sales growth of 10% in each of the next three years.
Plus, Philip Morris offers a very attractive dividend yield of 5.9%. The company has maintained its dividend through good times and bad — despite the fact that is consumes more than 90% of its free cash flow. PM stock has risen 33% to $80 a share since the global stock market crash this past March.
Few companies are likely to benefit more from the reopening of the economy than DraftKings. The fantasy sports and online sports betting operator saw its business devastated by the shutdown of major sports leagues and events. The loss of the March Madness tournament, the NBA basketball playoffs and golf majors severely hurt the company this past spring, sending its stock down to a low of $9.84 per share.
But now, with baseball, basketball and hockey back, and the NFL football season about to start, things are looking up for DraftKings and its shareholders. The stock has more than tripled since June 1, rising to its current level of $40. Plus, a number of institutional investors and hedge funds have turned bullish on the stock.
DraftKings also got a boost recently when basketball legend Michael Jordan publicly endorsed the sports betting firm and announced that he is taking an equity stake in the company. DKNG stock jumped 7% on that news. A few days after the announcement, DraftKings unveiled an exclusive partnership with the Chicago Cubs baseball team. Moving forward, DraftKings will be the Cubs’ official daily fantasy and sports betting partner. Look for similar deals with other sports teams in the coming months.
But, more than anything, DraftKings should see a huge boost with the resumption of NFL football, which is the sport that attracts the most fantasy sports play and betting. Overall, the sports betting market is forecast to reach $8 billion by 2025.
Sin Stocks: MGM Resorts (MGM)
MGM Resorts has been harder hit than almost any company by the pandemic. The hotel and casino operator is right up there with cruise lines and airlines when it comes to coronavirus pain. The most recent announcement from MGM Resorts was that it is laying off 18,000 employees. Ouch!
Yet while Covid-19 has hurt the company, there is reason to believe that MGM Resorts can respond strongly as the economy reopens. It should be able to capitalize on pent-up demand once a vaccine becomes widely available. In a vote of confidence, IAC/InterActiveCorp (NASDAQ:IAC) recently invested $1 billion in MGM Resorts, stating that it saw the current stock price of $23.52 as a “buying opportunity.”
And MGM Resorts is gradually starting to reopen many of the signature hotels and casinos. Most recently, the company reopened its famed Mirage hotel and casino in Las Vegas in time for the Labor Day long weekend. It had previously opened other major resorts, including the Bellagio and MGM Grand. The company is also restarting its operations overseas, notably in the gambling mecca of Macau, China. These reopenings should put MGM Resorts in a good position for when travel and conventions resume in earnest sometime next year.
Smith & Wesson (SWBI)
Like tobacco, firearms manufacturers have a tough go of it. Tobacco and firearms are the two sectors most at risk of government regulations and restrictions around the world. Yet Smith & Wesson continues to perform well despite the headwinds.
The company just reported better-than-expected Q1 results on record firearms sales. Smith & Wesson’s earnings surged more than 310%, while its revenues jumped 124.8% year-over-year. Also, in August, the company finalized the sale of its “Outdoor Products & Accessories” segment, and, as a result, the company announced a quarterly cash dividend of 5 cents per share to be paid out on Oct. 1.
All the good news has propelled SWBI stock higher.
Shares were trading as a penny stock in March at $4.57. Since then, the share price has more than quadrupled to $17. Analysts feel that Smith & Wesson shares have more room to run in the coming months with a median price target of $23 per share, suggesting 32% further upside for the stock. Smith & Wesson currently has a “buy” rating.
Given how well the company has performed during the pandemic, it is likely to do even better as the economy regains its footing and gathers momentum in the coming months.
Sin Stocks: Vitium Global Fund (VICEX)
I want to end this list with a fund that combines and tracks the full range of sin stocks — tobacco, gambling, alcohol, marijuana and firearms. There is no better fund than the infamous Vitium Global Fund, which trades under the symbol VICEX. Vitium is the Latin word for vice.
Importantly, the fund recently announced some changes to its structure with 40% of its holdings now coming from companies outside the U.S. Still, its top holdings include Philip Morris, Lockheed Martin (NYSE:LMT) and Diageo (NYSE:DGE), among others.
Overall, VICEX has performed well this year despite the pandemic. The share price for the Vitium Global Fund has risen 45% from a March low of $19.06 to its current price of $27.50. While some individual sin stocks have posted higher returns, the Vitium Global Fund has provided solid returns to investors during a time of great uncertainty.
For people who want exposure to sin stocks without having to go through the trouble of evaluating and selecting individual companies, the Vitium Global Fund is a good option. It provides diversification across a range of popular diversions and vices.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.