Sin stocks. Vice investments. Merchants of death. They all sound delightfully naughty, don’t they?
That’s because they are. Based on the recent returns of alcohol and tobacco stocks, investors might conclude that it’s good to be bad. In a year marked by macroeconomic shock waves emanating from Europe, popular sin stocks like Altria ($MO), Philip Morris International ($PM), Diageo ($DEO), and Anheuser Busch InBev ($BUD) are all trading near 52-week highs.
Over long investment time horizons, the story is much the same. Vice investments tend to outperform the broader markets by a significant margin over the long haul. In his eminently readable book The Future for Investors, Professor Jeremy Siegel found that the most profitable stock market investment in U.S. history was tobacco giant Altria—and this despite decades of falling tobacco usage among Americans and an endless string of punitive lawsuits.
Princeton Professor Harrison Hong and New York University professor Marcin Kacperczyk echoed these findings in their 2007 white paper The Price of Sin: The Effects of Social Norms on the Markets. The professors found that the taboos associated with investing in politically incorrect industries such as tobacco, alcohol and gaming led these sectors to be priced as perpetual value stocks. Many big institutional investors, such as pension funds and endowments, are prohibited from investing in these industries, which creates attractive pricing and dividend yields for investors with no such restrictions.
Investors should keep in mind, however, that not all sin stocks are created equal.
Other than being collectively shunned by socially-responsible investors, the different categories of vice investments have very little in common. Tobacco and alcohol are both considered defensive consumer staples, whereas gaming stocks are far more cyclical and dependent on the health of the travel and tourism industries.
There is a reason why the Las Vegas casino stocks were not included in the list above of sin stocks making new 52-week highs. MGM Resorts ($MGM), Wynn Resorts ($WYNN) and Las Vegas Sands ($LVS) have all suffered in recent years due to overcapacity and a tourist dearth. Just this past week, the Nevada Gaming Control Board reported that the state’s gambling revenue fell sharply in May, the last month for which there was data. Revenues on the Las Vegas Strip were down a full 18%.
But even within the alcohol and tobacco sphere—the “booze and butts”, if you will—the industry economics are very different. Because of legal restrictions tobacco companies have very limited opportunities to advertise, whereas advertising and marketing are a major expense for spirits companies and are essential to the success of the brands. Half of the pleasure of enjoying a nice scotch is the feeling of quality and exclusivity that the brand projects. And who hasn’t seen the “most interesting man in the world” commercials and instantly wanted to drink a Dos Equis beer?
Implications for Investors
Sizemore Capital is a big believer in vice investing, and Altria and Diageo have been in our portfolios for multiple years. Barring an irrational surge in their prices, these are stocks that I would be content to own forever, and they are a fine addition for any investor looking for current income. But we do not currently have any positions in gaming stocks.
The stable consistently that makes booze and butts stocks attractive is not present in the gambling industry. This is not to say that gaming stocks cannot be profitably traded, and at the right price they could certainly be attractive. But these are stocks that should be viewed as short-term trades rather than long-term dividend generators.