Study Suggests 'Sin Stocks' Will Always Outperform The Market

by: Rupert Hargreaves


Sin stocks have been shown to outperform the market over the past few decades.

The reason for this out performance is what can only be called an anomaly.

Other data shows that sin stocks act differently to the wider market in general for many different reasons.

If you've ever owned a "sin company" stock you'll know that over the long-term, they tend to outperform the market. What do I mean by sin companies? Well, this generally means any company that is involved in, or works with an industry that is active in one of the great sins of life; gambling, tobacco, sex, defense, or alcohol.

A few examples:

Tobacco companies such as

  • Altria Group Inc (NYSE:MO)
  • Philip Morris International Inc. (NYSE:PM)
  • Reynolds American, Inc. (NYSE:RAI)
  • Lorillard Inc. (NYSE:LO)

Gaming companies:

  • Las Vegas Sands Corp. (NYSE:LVS)
  • Wynn Resorts, Limited (NASDAQ:WYNN)
  • Melco Crown Entertainment Ltd (ADR) (MPEL)
  • MGM Resorts International (NYSE:MGM)

Defense groups:

  • General Dynamics Corporation (NYSE:GD)
  • Northrop Grumman Corporation (NYSE:NOC)
  • Raytheon Company (NYSE:RTN)
  • Lockheed Martin Corporation (NYSE:LMT)

Alcoholic beverage companies:

  • Diageo plc (ADR) (NYSE:DEO)
  • Brown-Forman Corporation (NYSE:BF.B)
  • Constellation Brands, Inc. (NYSE:STZ)
  • Molson Coors Brewing Company (NYSE:TAP)
  • Heineken N.V. (ADR) (OTCMKTS:HINKY)
  • SABMiller plc (ADR) (OTCPK:SBMRY)

These companies have all been able to outperform the market over the long-term.

Why these sin stocks have outperformed, is, what can only be called an anomaly.

In fact, these companies act in a completely different way to the rest of the market, it's not just their performance that is better-than-average.

A study published within the 2009 Journal of Financial Economics, written by H. Hong and M. Kacperczyk and entitled, The price of sin: The effects of social norms on markets, looks into the performance of these companies, providing evidence that the stocks of publicly traded "sin" companies have long acted differently to the rest of the market.

I've only outlined the most important parts of the study here. While H. Hong and M. Kacperczyk do conduct a really in depth analysis of the market and why sin stocks outperform, it wouldn't make sense to detail the whole summary here, there's just too much data to easily digest in one go. For those who are interested, the study is linked above and here.

I should note that H. Hong and M. Kacperczyk discount defense stocks from their study, due to the fact that very few American's count defense as a sin (not the same in Europe) and sex stocks are excluded due to the fact that there are few publicly traded companies that are active within this industry. Still, if you look at the performance of those defense stocks listed above, as well as, for example, Church & Dwight Co., Inc. (NYSE:CHD) producer of the Trojan condom brand, they have beaten the market for many years.


Hong and Kacperczyk find that between 1985 and 2006, sin companies outperformed the market by 21 bps -- 0.21% -- per month, or around 2.5% per year. However, domestic U.S. sin companies outperformed by 28 bps -- 0.28% -- per month. The explanation for this outperformance has something to do with the tobacco sector. Specifically, after big tobacco started to split up in the 90s/20s lawsuits came thick and fast, which, for some reason, only made the sector more appealing to investors. With lawsuits hitting the sector from every side, investors were actually more attracted to tobacco stocks driving sector outperformance.

Adding to the confusion, is data published within the study showing big tobacco's performance before the tobacco sector became a sin. Indeed, pre 1960 the detrimental effects of smoking were relatively unknown, so tobacco investing was not considered to be "evil". After the 1960s, tobacco became a sin as its link with cancer was made. Nevertheless, H. Hong and M. Kacperczyk found that over the period 1947 to 1965, the sector underperformed the market by around 40% on average, 300bps, or 3% per year.

Tobacco is the only sector that has become a sin within the last century, so it is the only sector which researchers can study "pre" and "post" sin status. This has enabled researchers to assess the effect "becoming a sin" has on sector performance. As the figures above show, after becoming a sin, the tobacco sector really jumped into life.

Other notable figures the study turned up were:

  • Tobacco had the lowest beta of the sin group. The three portfolios of interest, beer, smoking, and gaming had betas of 0.94, 0.63, and 1.12, respectively.

  • Sin stocks on average were typically avoided by analysts. The typical stock received coverage from about 1.7 analysts, while sin stocks were only followed by 1.3 analysts on average. A 21% decline in coverage relative to the mean.

  • Valuation ratios of sin stocks were about 15% to 20% lower than those of other companies, between 1965 and 2006.

  • All in all, Hong and Kacperczyk found that on average, over the period 1962 to 2006, sin stocks around the world outperformed the market by 2% per year. And over the past ten years, this performance has only improved.

These results are surprising and revealing. While many investors avoid the sin stock group, the study suggests that their performance is being held back because of it.

Ethical reasons

That being said, avoiding sin stocks for ethical reasons is a different argument and every investor is entitled to their own opinion and investing strategy. This article should not be viewed as a piece that's trying to change opinions or discredit ethical investing.

Actually, for the purpose of presenting a balance view, as part of the study, H. Hong and M. Kacperczyk looked into looks into the effect that socially responsible investing has on corporations. Simply put, they tries to establish whether or not socially responsible investing is actually justifiable and if it having an effect on companies.

What they found was that as many institutional investors avoid sin companies, levels of debt are higher across the sin industry. The paper found that the average sin company has a leverage ratio 19.3% higher than the typical company, as it is difficult to raise funding through equity markets. Instead companies are forced to raise capital through debt markets at a higher rate of interest -- Hong and Kacperczyk found that sin companies, on average, have a higher cost of capital than non-sin companies. Although it remains to be seen if this is the case nowadays with investor scrambling for any kind of yield. Still, these are some interesting figures and ones that seem to support that ethical investing trends are having an effect on sin industries.

The Bottom Line

"The price of sin: The effects of social norms on markets" study throws up some interesting ideas and figures. It seems as if the idea and categorization of sin stocks is only driving their outperformance. And outperformance of 2% per annum is a noticeable difference.

However, sin stocks are not suitable for every investor, so this article and the study should not be viewed as preaching the benefits, or trying to say the opinions of those investors with an ethical investing brief. Neither does the study assume, or state that this outperformance will continue.

Overall, H. Hong and M. Kacperczyk provide some interest food for thought; for those interested in historical data trends.

Disclosure: The author is long MO, LO.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.