If you had to pick one sector that you can rely on when things get difficult, sin stocks would represent an incredibly tempting proposition. While companies based on a cynical or even outright lurid business model are often attractive in the best of times, it’s at our worst when this sector has a powerful draw.
A perfect example is a CNBC report detailing the boom during the Great Recession in what I will term “gentlemen’s establishments.” I don’t think anybody should be surprised at this. With so many male power players losing their jobs, many sought such businesses for escapism. It’s no wonder why sin stocks, whether directly or indirectly sinful, have so much allure.
I would have thought, however, that the novel coronavirus pandemic would have blunted enthusiasm for this line of work. But if the year-to-date performance of RCI Hospitality (NASDAQ:RICK) is anything to go by — and you know what kind of hospitality we’re talking about — it’s that the intimacy industry is almost inhumanely resilient. I mean, people can die exercising this fantasy right now and apparently to many folks, it just doesn’t matter.
Still, this doesn’t mean that you should blindly buy whatever sin stocks that come across your radar. As you’ll see in the list below, even fundamentally logical plays, such as investments based on consumer addictions, hasn’t quite panned out. Therefore, no sector is sacrosanct. You’ve got to perform your due diligence no matter what.
As well, politics can play a big role with vice-related investments. Although a presidential administration can facilitate upside in one naughty sector, it could derail another one. Here are seven sin stocks that you might want to steer clear of, or at least be cautious about.
- The GEO Group (NYSE:GEO)
- CoreCivic (NYSE:CXW)
- Occidental Petroleum (NYSE:OXY)
- British American Tobacco (NYSE:BTI)
- Caesars Entertainment (NASDAQ:CZR)
- EZCorp (NASDAQ:EZPW)
- Naked Brand Group (NASDAQ:NAKD)
On a final note, some of the sin stocks below aren’t permanently busted. Depending on how society and the economy reacts to President-elect Joe Biden’s administration, these names could pop back up. But for now, you may want to avoid eating that forbidden fruit.
Sin Stocks to Watch: The GEO Group (GEO)
Although Democrats generally view the cannabis industry as a sector that should be fully legalized, there’s one major exception: President-elect Joe Biden. However, he and running mate Vice President-elect Kamala Harris have pledged to decriminalize marijuana, which is an encouraging step for botanical sin stocks. However, what’s on the chopping block are private correctional facilities like The GEO Group.
According to the Pew Research Center, 40% of U.S. drug arrests in 2018 were for marijuana offenses. Mostly, these crimes were possession related. Not surprisingly, many advocates for criminal reform justice have blasted how law enforcement and the judicial system prosecute cannabis-related charges. Of course, this segment features much debate, something that I don’t want to get into at the moment. Suffice to say, though, decriminalization of any activity would not be helpful for GEO stock.
As well, with our country attempting to recover from the novel coronavirus pandemic, the private prison industry’s negative economic impact could represent a liability to the Biden administration. Therefore, GEO stock is one of the sin stocks you should probably avoid.
Although a Biden White House likely won’t benefit private-corrections related sin stocks like CoreCivic, there is a counterargument to consider. As you know, Democrats love making new laws. Some of them are economically dubious like California’s “gig worker” bill, but others can be socially detrimental, such as onerous gun control measures.
If anti-gun Biden and Harris push for restrictions on so-called “assault weapons” (note to gun advocates: I said “so called.” I realize that they’re really “sporter rifles.”), millions of Americans can end up becoming criminals for completely arbitrary reasons. Cynically, that should support CXW stock.
However, with Biden having now secured victory — at least, we think so — his primary job is to bring the country together. After all, if he leaves the country as divided as it currently is, he would be no better off than the Trump administration. As well, the Democrats would lose significant credibility. Keep in mind that the election was much tighter than anticipated. Ultimately, the power of decriminalization may win out, making CXW stock a questionable investment.
Occidental Petroleum (OXY)
When we think of sin stocks, we typically have an image of lurid, intimacy-related organizations. However, very few truly “wicked” companies exist nowadays. Instead, it’s helpful to consider what the antithesis of an ESG investment is, or corporations that espouse environmental, social and governance concerns. Due to the underlying business, Occidental Petroleum falls into our naughty list.
Except that maybe that’s not such a great analogy. If you gave a fossil-fuel related energy firm a stocking full of coal, it’d find some way of making a profit off it, the environment be damned! However, I’m not cautious about OXY stock because it’s an ESG violator. Rather, the company is deeply embattled as it tries to navigate an already beleaguered industry.
Honestly, I’m not too hot on the recovery chances of OXY stock. First, the underlying company made painfully expensive acquisitions at exactly the wrong time. Second, there’s really no demand. With Covid-19 cases rising to absolutely bonkers levels, more restrictive measures may be on the way. That’s just not good for the entire sector, no matter how robust the individual balance sheet may be.
British American Tobacco (BTI)
I’m very conflicted about this next one. In terms of sin stocks, British American Tobacco should theoretically receive tailwinds due to the novel coronavirus pandemic. It’s not just about the health threat. Rather, the crisis also impacts our livelihood. As anyone who’s ever lost a job can attest, this is one of the most brutal experiences.
Thus, on a cynical basis, I like tobacco-related investments like BTI stock. During the lockdowns earlier this year, alcohol sales spiked up, presumably because people needed a coping mechanism. I thought this would apply to the tobacco industry as well. And academic research indicates that this may be the case, with a study revealing that “Most nicotine consumers report using nicotine products as their main stress and anxiety coping mechanism.”
However, BTI stock has been disappointing, crumbling in early July. Unfortunately for stakeholders, it appears that Covid-19 is a one-off catalyst. Sure enough, a second wave in Europe, along with accelerating cases in the U.S., is helping drive up BTI. But people who happen to be profitable from this movement may want to consider trimming their exposure.
Caesars Entertainment (CZR)
On many levels, Caesars Entertainment is one of the sin stocks in which you should adopt a positive contrarian position. After the summer surge in coronavirus cases, many states gradually began reopening. But true to style, Las Vegas was a step ahead, with Sin City opening its doors in June. Further, the response was very robust, giving credence to the pent-up demand argument for CZR stock.
As a result, contrarian investors who put their money where their mouth was reaped substantial profits from the March doldrums. The idea here was that you can’t keep Americans locked in their homes forever. At some point, people want to get out and feel human again, coronavirus or not. Therefore, this comeback sentiment buoyed CZR stock.
Far be it from me to play the role of Debbie Downer. However, the numbers coming out of the Centers for Disease Control and Prevention are scary. On Nov. 11, new daily coronavirus cases breached the 143,000 level. This implies we really need to get control of the pandemic before we incur further long-term economic damage. Sadly, that might curb the present rally in CZR stock.
Fundamentally, EZCorp should be another example among sin stocks that should enjoy a massive tailwind during this crisis. As a pawn shop specialist, EZCorp fills a critical need. For many reasons, people find themselves down on their luck. In order to secure some much-needed cash, these individuals put up objects of value as collateral for a loan. You figure with this crisis that there will be many such examples, thereby boosting the case for EZPW stock.
However, the technical case for EZCorp just hasn’t been favorable. From a financial perspective, you can make the argument that EZPW stock is grossly undervalued. So, what explains this dichotomy between positive fundamentals and disappointing price action?
Primarily, the economic crisis was a shock that impacted everyone, from high-risk credit individuals to those who’ve lived responsibly. Therefore, many of the impacted may not want to put up their valuable possessions for collateral. You can look at the sharp rise of companies like Public Storage (NYSE:PSA) as evidence.
Still, if this recession continues, the pawn broker industry could have a heyday. But for now, the technicals are very weak so caution is warranted.
Naked Brand Group (NAKD)
It’s not just certain sin stocks that have suffered during the pandemic. In many cases, the opportunity to commit sin has been greatly diminished. Case in point is the dating game. Once Covid-19 became part of our new normal, going out and mingling suddenly became risky. And with that, the crisis has been especially brutal for singles.
Certainly, Naked Brand Group would know. As a specialist in lingerie and other intimate apparel, NAKD stock benefits when the rest of society is getting frisky. Obviously, that’s not happening, at least not to the volume of pre-pandemic levels. Therefore, the impetus to purchase sexy clothing goes out the window.
Moreover, Naked Brand was already under pressure before the crisis began. Mainly, this is due to demographic shifts. Unlike prior generations, millennials simply don’t care for branded fashion. Many openly reject the idea of being a walking billboard for corporate interests. Frankly, Naked hasn’t been able to adapt to this narrative, making NAKD stock unnecessarily risky.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.