• The “sin stocks” label traditionally refers to gambling, alcohol, tobacco, and weapons companies.
• Sin stocks are considered defensive stocks, meaning they tend to perform well even during an economic downturn.
• Though relatively stable, sin stocks carry some special risks, such as being vulnerable to changes in regulations or taxes.
Its known that, so much attention is currently focused on ‘doing the right thing’ when it comes to investing your money. It‘s no longer enough for fund managers to look for companies likely to offer investors the best returns. Now they must tick the ’responsibility‘ box. The slogan ’doing well by doing good‘ suggests that investing in a manner consistent with ESG (Environmental, Social and Governance) investing can pay off. In other words, it’s possible to construct a portfolio that only contains companies that tick a few ESG boxes, while excluding the obvious sin stocks, and make superior gains. That may be true. But overall, studies suggest that the jury is still out on this one.
The growth of socially responsible investing and ethical consumerism has become more prominent in the investing space. With that, an investor who wishes to align their morals with how they build their portfolio would likely want to avoid a particular type of stock: sin stocks.
Even though some investors may find sin stocks objectionable, they tend to perform well in both bull and bear markets. They also tend to do well regardless of which phase of the business cycle the economy is currently in, even a recession.
What is a sin stock？
Sin stocks are shares of a company that an investor may deem unethical. When academics study sin stocks and make generalities about how sin stocks perform, they usually focus on the “sin triumvirate,” which includes alcohol, tobacco, and gambling. Some academics add the weapons industry to this list, dubbed the “big four” sin stocks.
However, on an individual level, just because you've invested in a company that doesn't fall under these predetermined industries does it mean the company's stocks aren't considered sin stocks. That determination largely comes down to the individual investor's moral compass. If you find that the way energy companies operate is immoral, but you invest anyway, that's a sin stock.
Examples of sin stocks
Other stocks and sectors can be considered immoral too — depending on your religion, politics, and ethical values.
Environmentalists might classify oil and coal stocks as sin stocks, considering the companies behind them to be polluters. Vegans might consider shares of any company that raises animals, sells animal products, or tests on animals to be a sin stock.
Though not a stock, cryptocurrencies that operate on proof-of-work and thus eat up energy in the mining process may also find they don't have a place in the portfolio of an environmentally conscious investor.
Socially conscious investors might also avoid investing in companies or industries that engage in unfair labor practices, like the chocolate or coffee industries, which engage in child labor. Some investors might also stay away from companies that profit off of the prison industrial complex. Other companies, such as the meatpacking industry, have historically mistreated their employees.
Sin stock categories and companies
A variety of corporations could be called sin players. The categories include the traditional Big Four of the sin stock sector, along with some newer but commonly cited fields.
• Alcohol: Anheuser-Busch InBev (BUD), Molson Coors Brewing Company (MCBC), Boston Beer Company (SAM), Constellation Brands (STZ), Diageo (DGEAF), Brown-Forman (BF)
• Defense/weapons: Boeing (BA), Northrup Gruman (NOC), Aerojet Rocketdyne (AJRD), Raytheon (RTX), Lockheed Martin (LMT), American Outdoor Brands (AOBC), Olin (OLN), Vista Outdoor (VSTO), Sturm, Ruger (RGR)
• Tobacco: Altria (MO), British American Tobacco (BTAFF), Philip Morris (PM)
• Gambling/adult entertainment: Las Vegas Sands (LVS), MGM Resorts (MGM), Wynn Resorts (WYNN), Penn National Gaming (PENN), Caesars Entertainment (CZR), Boyd Gaming (BYD), Scientific Games (SGMS), DraftKings (DKNG), RCI Hospitality Holdings (RICK)
• Marijuana/cannabis: Cronos (CRON), Canopy Growth (CGC), Aurora Cannabis (ACB), Aphria (APHA), Tilray (TLRY), GrowGeneration (GRWG)
• Corrections/prisons: CoreCivic (CXW), The GEO Group (GEO)
• Payday lenders/pawnbrokers: Enova International (ENVA), EZCorp (EZPW), FirstCash Financial (FCFS), QCHI (QCCO)
• Energy: Energy Transfer LP (ETP), ExxonMobil (XOM), Kinder Morgan (KMI)
• Meat: Hormel Foods (HRL), Sanderson Farms (SAFM), Tyson Foods (TSN)
• Snacks/junk food: Coca-Cola (KO), Mondelez International (MDLZ), Hershey (HSY), PepsiCo (PEP), McDonald's (MCD
The ‘sin’ conundrum
Other sin stocks include businesses that are heavy polluters or those that engage in poor labour practices. BP would seem to be an obvious example of the former, despite the greenwash that covers the oil giant‘s website. But it could be argued that for as long as we rely on fossil fuels, which looks like being a significant length of time, maybe BP is in some ways an ethically responsible energy choice, as it may be more aware of its environmental responsibilities than other smaller, less public oil companies. High profile tech companies such as Amazon and Uber can tick plenty of boxes for ethical investors, but both could be considered sin stocks due to their poor record when it comes to their treatment of their employees. I think it’s fair to say that one person‘s ethically responsible company is another person’s sin stock, which makes things complicated. And its no good looking for an ESG-compliant Exchange Traded Fund to make the decision for you. As the Capitalist Exploits newsletter recently highlighted, the iShares ESG USA Index has a 2.5% weighting to oil and gas stocks which is much the same as the S&P 500.
Making money
But how is it possible to make money out of sin stocks？ If investors continually shun them then surely, they will always be undervalued. The fact that they are less in demand than, say, growth stocks such as Apple, Alphabet, Facebook, and Tesla means they will remain undervalued, but also more stable. Sin stocks are typically shielded from economic and geopolitical developments. Drinkers didnt stop drinking because there was a pandemic going on, quite the opposite.
And gamblers haven‘t stop gambling because inflation is going up. Most of us still rely on fossil fuels to drive our cars and heat our homes, and we’ll continue to do so no matter what poorly considered environmental targets get thrown up by governments. Most regrettably, wars and security threats will always be with us. Overall, theres a solidity and predictability in sin stocks because demand is always there. Predictability in revenues and profits, even in recessions, means many of these companies reward their investors with healthy dividends, even if their product is far from healthy.
Be careful out there
So never fear, there are plenty of investors out there prepared to hoover up what more discerning players are willing to shun. It‘s easy to find sin stocks, just ’google‘ it. Then you’ll find long lists of the top bad-boy companies, including brewers and tobacco companies, arms manufacturers, and gambling outfits. There are also a Vice ETF to help you get started. But, as with any form of investing, make sure you do your own homework and due diligence. Keep diversified, and don‘t trade, especially on leverage, with money you can’t afford to lose.
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