Sin stocks refer to shares of vice-related public companies. Traditionally, the term has been used for stocks in gambling, tobacco, alcohol, defense, cannabis and adult entertainment industries. As a result, most companies in these sectors usually do not qualify as environmental, social, and governance (ESG) investments.
Academic research highlights that, “carbon-intensive sectors … have newly evolved as sin stocks, such as oil and gas, metals and mining, uranium, and coal.” Institutional investors typically hesitate before committing money into vice businesses. Thus, sin stocks often tend to be underpriced, allowing their shareholders to benefit from this “reputation risk.”
Yet, sin stocks are considered recession-proof and remain relatively stable amid economic turbulences. A recent study by Greg M. Richey of the University of California says, “Bad-news events have a lesser impact on sin stock return volatility than do good-news events.”
As people drink, smoke and gamble in both good times and bad, they often don’t see their own sins as discretionary. In general, sin stocks suffer only when economic conditions are extremely tough. Then, some consumers have to decrease or even stop spending on their vices. However, most individuals typically return to their vices once the economy improves, and they tend to spend steadily during bull markets.
With that information, here are seven sin stocks that could bring lucrative returns in the coming months.
- AdvisorShares Vice ETF (NYSEARCA:VICE)
- Altria Group (NYSE:MO)
- Constellation Brands (NYSE:STZ)
- Draftkings (NASDAQ:DKNG)
- Electronic Arts (NASDAQ:EA)
- McDonald’s (NYSE:MCD)
- Smith & Wesson Brands (NASDAQ:SWBI)
Sin Stocks to Buy: AdvisorShares Vice ETF (VICE)
52-Week Range: $29.04 – $36.86
Dividend Yield: 1.02%
Expense Ratio: 0.99% per year
Our first discussion is on an exchange-traded fund (ETF), namely, the AdvisorShares Vice ETF. It provides exposure to global vice industry companies from alcohol, tobacco, gaming, and restaurant and hospitality industries.
This actively managed fund started trading in December 2017. In November 2020, the ETF made a ticker change based on its modified investment strategy.
VICE currently has 38 holdings. It is a small fund with $11 million in total net assets. The top 10 holdings comprise around 45% of total net assets.
In terms of sector allocation, we see: Gambling and casinos (35.6%), alcohol (21.1%), restaurants and hospitality (20.8%), tobacco (9.8%), and video games and e-sports (6.5%) topping the distribution.
The leading names on the roster include the restaurant chain Del Taco Restaurants (NASDAQ:TACO); gentlemen’s clubs and sports bar operator RCI Hospitality Holdings (NASDAQ:RICK); interactive entertainment content and services developer Activision Blizzard (NASDAQ:ATVI); real estate investment trust Gaming and Leisure Properties (NASDAQ:GLPI); and wines and spirits producer Pernod Ricard (OTCMKTS:PRNDY).
VICE hit a record high in June. Yet, over the 12 months, the fund is down 7%. It declined almost 8% year-to-date (YTD) as well. Potential investors could regard the recent drop in price as a better entry point.
Altria Group (MO)
52-week range: $42.53 – $52.59
Dividend yield: 7.14%
Next on our list is the global tobacco giant Altria, one of the most prominent names in cigarettes and smokeless tobacco in the U.S. It also holds a 10% stake in Anheuser-Busch InBev (NYSE:BUD) and a 45% stake in the marijuana company Cronos (NASDAQ:CRON).
The tobacco group announced Q4, 2021 results on Jan. 27. Revenue declined 1% year-over-year (YOY) to $6.3 billion. Net earnings came in at $1.62 billion, or 88 cents per diluted share, down 15.5% from $1.92 billion, or $1.03 per diluted share, in the prior-year quarter. Cash and equivalents ended the quarter at $4.54 billion.
On these metrics, CEO Billy Gifford said, “We returned more than $8.1 billion in cash to shareholders in 2021 through dividends and share repurchases.”
Wall Street noted that Altria has been turning into a cash cow despite the overall decline of smokers stateside. Its 2021 cigarette volume declined 7.5% YOY to 93.8 billion sticks. Yet, in order to compensate for falling sales volume, management is regularly raising its prices.
Given rising inflation, a high-yielding dividend stock like Altria is an attractive bet for income-focused investors. The Dividend King currently offers a generous 7.14% yield.
MO stock hovers around $50 territory, up 18% over the past 12 months. Shares are trading at 10.5 times forward earnings and 4.41 times trailing sales. The 12-month median price forecast for Altria Group stands at $52.
Sin Stocks to Buy: Constellation Brands (STZ)
52-week range: $207.35 – $258.00
Dividend yield: 1.27%
Constellation Brands is one of the largest multi-category alcohol groups worldwide. The company boasts a portfolio of high-end Mexican beer trademarks, as well as a 37% stake in the cannabis company Canopy Growth (NASDAQ:CGC).
Constellation Brands released Q3, FY22 results on Jan. 6. Revenue declined 5% YOY to $2.32 billion. Net income came in at $592 million, or $3.12 per diluted share, down from $604 million, or $3.09 per diluted share, a year ago. Cash and equivalents ended the quarter at $361 million.
Despite the sluggish industry growth, its beer sales soared 4% to $1.75 billion, driven by the continued strength of the Corona and Modelo family of beers. As a result, the beer business expects 10-11% net sales growth and 6-7% operating income growth for fiscal 2022.
However, operating margins fell due to rising prices for materials like aluminum and glass. Higher transportation costs also meant headwinds. Constellation will likely raise prices in 2022, which may impact topline growth going forward.
Meanwhile, the beverage maker announced a new partnership with Coca-Cola (NYSE:KO) to bring an alcoholic version of the Fresca brand to the market by the end of the year.
STZ stock is currently priced around $238, up 4% over the past 12 months. Shares are trading at 19.6 times forward earnings and 5.3 times trailing sales. The 12-month median price forecast for Constellation Brands is $277.
52-week range: $17.41 – $74.38
Boston, Massachusetts-based DraftKings is a well-known digital sports entertainment and gaming name. It offers users daily fantasy sports, sports betting and iGaming opportunities.
DraftKings issued Q3, 2021 results in early November. Revenue increased 60% YOY to $213 million. Net loss widened to $545 million, or $1.35 per diluted share, compared to $395 million in the prior-year period. Cash and equivalents ended the quarter at $2.9 billion.
The company has seen rapid top line growth, capitalizing on the readiness of state legislatures to legalize mobile gaming activities. In November, the company offered mobile sports betting in 15 states. Since then, the company has also launched mobile sports betting in Louisiana and New York.
However, investors are more focused on DraftKings’ bottom-line figures. The company has spent $703 million on sales and marketing through the first three quarters of 2021 to acquire new customers. Its total loss from business operations during the period currently stands at $1.2 billion. The timeline to achieve profitability is not yet clear.
DKNG stock hovers around $21, down more than 65% over the past year. Shares have declined 22% YTD, currently trading at 7.1 times trailing sales. The 12-month median price forecast for Draftkings stock stands at $45.
Sin Stocks to Buy: Electronic Arts (EA)
52-week range: $120.08 – $148.98
Dividend yield: 0.5%
Video game name Electronic Arts has become one of the largest pure gaming companies worldwide. The company boasts 540 million active accounts on its EA player network, thanks to dozens of well-known franchises. The company has become a borderline sin stock based on its unpopular consumer practices.
In the past few years, EA has introduced multiple new money-makers in their games via “loot boxes,” or in-game purchases that gambles for a virtual item of a certain value at a base cost.
EA announced Q3, FY22 results on Feb.1. Revenue increased 7% YOY to $1.79 billion. Net income came in at $66 million, or 23 cents per diluted share, down from $211 million, or 72 cents per diluted share, in the prior-year quarter. Cash and equivalents ended the period at $2.67 billion.
“Q3 was the largest quarter in the company’s history for net bookings, underlying profitability and cash generation,” remarked CFO Blake Jorgensen.
EA seems to be on track to grow following surging demand in fiscal 2021. Net bookings for the trailing twelve months increased 22% YOY to $7.25 billion. Investors were pleased to see that management believes its 2022 release pipeline is stable.
Meanwhile, the industry has been paying attention to Microsoft’s (NASDAQ:MSFT) surprise announcement to acquire Activision Blizzard (NASDAQ:ATVI). Now, a number of analysts suggest that Electronic Arts could become a potential acquisition target as well.
EA stock changes hands for $136, down 3% over the past year. Therefore, shares now have a more reasonable valuation at 18.7 times forward earnings and 6.1 times trailing sales. The 12-month median price forecast for Electronic Arts is $165.50.
52-week range: $202.73 – $271.15
Dividend Yield: 2.12%
Increasing levels of obesity in our society as well as globally mean that other industries might come under the “vice” label as well. Our next choice, McDonald’s, is one of the fast-food industry leaders that increasingly come under scrutiny due to potential health issues related with weight gain.
Yet, analysts concur that McDonald’s is one of the most important restaurant names. It has transformed the fast-food industry by growing its global footprint via partnerships with independent restaurant franchisees.
Management announced Q4, 2021 results on Jan. 27. Revenue increased 13% YOY to $6 billion. Net income came in at $1.6 billion, or $2.18 per diluted share, up from $1.4 billion, or $1.84 per diluted share, in the prior-year quarter. Cash and equivalents ended the period at $4.7 billion.
During the quarter, McDonald’s has seen increased customer traffic and an increase in average spending per visit across all key geographic regions. In fact, it was the fastest U.S. growth rate on record. The global chain also saw worldwide sales volume soar 21% YOY to $112.5 billion for the full year.
However, the fast-food giant has faced inflationary pressures to pass along higher food costs to customers. But Wall Street noted that McDonald’s has more than offset these pressures via price increases and cost cuts.
Management’s focus on drive-thru and delivery sales has also helped revenue figures. As a result, operating income increased 17% YOY to cross $10 billion for the full year.
Investors are hopeful that McDonald’s can flourish even in tough market environments. As a result, MCD stock currently hovers slightly around $260, up 22% over the past 12 months. Shares are trading at 26 times forward earnings and 8.4 times trailing sales.
The 12-month median price forecast for McDonald’s stock stands at $282. Interested readers could wait for a potential decline toward $250 before hitting the “buy” button.
Sin Stocks to Buy: Smith & Wesson Brands (SWBI)
52 week range: $14.50 – $39.61
Dividend yield: 1.86%
Springfield, Massachusetts-based Smith & Wesson Brands is the largest firearms producer stateside. The company offers a broad portfolio of handguns.
Smith & Wesson released Q2, FY22 results on Dec. 2. Revenue came in at $230.5 million, down 7.3% YOY. Net income stood at $55.3 million, or $1.13 per diluted share, compared to $52.8 million, or $0.93 per diluted share, for the prior-year quarter. Cash and equivalents ended the quarter at $159 million.
On these metrics CFO Deana McPherson remarked, “We delivered a 370 basis point increase in gross margin that more than offset a 7.3% decrease in revenue compared with the prior year second quarter.”
U.S. gun sales had surged more than 60% in 2020. Then came a modest decline in 2021. Put another way, the demand for civilian firearms still remains strong. And Wall Street concurs SWBI still has plenty of opportunities to grow revenue.
SWBI currently looks like a value stock trading at $17 territory, down 22% over the past three months. Compared to its peers, shares are trading at a relative bargain at just 0.81 times trailing sales. The 12-month median price forecast for SWBI stock is $29.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.