Like It Or Not, Sin Pays

Includes: KO, MO, NOC, STZ
by: Kwan-Chen Ma


Sin industries are recession proof. The list of sin industries, a living thing, is extended to include fast food industries, such as McDonald's and Coke Cola, in recent years.

Over the last 37 years, sin stocks had an average annual return of 19% versus S&P 500's 7.9%.

For institutional fund managers, avoiding even the appearance of impropriety, perceived a failure to conform to social standards, is more important than making money.


You must be wondering why James Gandolfini and Cherry Coke are in the same picture.

In Episode 40 of the HBO series "The Sopranos," Anthony "Tony" Soprano, Sr., played by James Gandolfini, asks his right-hand man Silvio Dante (by Steven Van Zandt): "Sil, break it down for 'em. What two businesses have traditionally been recession-proof since time immemorial?" "Certain aspects of show business and Our Thing," Sil replies. For those of you not familiar with this HBO series, "certain aspects of show business" was the adult entertainment in Tony's Bada Bing Club. "Our Thing" was the organized crime which exploits the vices of frail humanity.

You got to love them!

In practice, sin stocks have earned higher returns than the market. The Vice Fund, launched in 2003, invests in only alcohol, tobacco, and gaming companies in the U.S. and foreign countries. This fund has earned an annualized return in excess of 20%.

A study by Faozzi, Ma and Oliphant (2008) has shown that sin stocks have outperformed the market over the long haul. Between January 1970 and June 2007, an average sin stock produced a monthly return of 1.64%, and an annual return over 19%, while the average stock market produced an average annual return of 7.9%.

Since 1970, a cigarette maker, Altria's stock (NYSE: MO) has returned 8856% to its shareholders, compared to the S&P 500's 2419%.

For the last 10 years, a liquor maker, Constellation Brands (NYSE: STZ) has returned 537% to its shareholders, compared to the S&P 500's 62%.

For the last 10 years, a major defense company, Northrop Grumman (NYSE: NOC) has returned 265% to its shares, compared to the S&P 500's 62%.

All sin industries outperformed across the board.

The same study also shows that every sin industry, including gaming, tobacco, alcohol, weapons, and adult services produced superior returns. The total returns range from a low of 13.5% for alcohol to a high of 33.5% for gaming. A similarly impressive pattern is also observed for sin stocks in the various national markets. The superior performance seems universal. In 16 of the 21 countries, sin stocks produced double-digit annual returns.

At the portfolio level, both measures indicate an annual excess return between 11.2% and 13.7%. The strong performance was also confirmed in each of the six industries. The annual excess market returns range from 5.3% for adult services to 26.4% for gaming. The risk-adjusted excess return for adult services is 1.4% and 49.2% for gaming. Of the 42 excess return measures, 40 are positive with the exceptions being Portugal and Taiwan, though each having only one sin stock.

Sin stocks stand the test of time.

The same study also shows that, during the 37-year study period, the Sin Portfolio produced negative returns in only 2 years, compared to 9 years of negative returns in the overall market. The Sin portfolio has generated double-digit positive returns in 31 of the 37 years, and outperformed overwhelmingly the relevant market index in 35 of 37 years.

While sin stocks outperformed unambiguously, some investors still hate them!

Many individual investors associate a firm making a "bad" product to a bad firm. They may not be willing to own the stocks because doing so would conflict with their values.

Before satellite radio, Howard Stern had 12 million daily listeners. Now his program is the number one-rated show on satellite radio. Jerry Springer had an 8.1 Nielsen Rating (8.1% of the television viewing audience), which approximated 13 million viewers, at his television shows' peak in 1998. At one time, Jerry Springer had higher ratings than Oprah. But how many people would admit they listen to Howard Stern or watch Jerry Springer?

To some, avoiding even the appearance of impropriety, perceived a failure to conform to social standards, is more important than making money.

In a survey conducted by Dukes, Bowlin and Ma (1996), when asking whether investors use their personal values in pricing stocks, the most likely reason for not investing in sin stocks is "because it won't look good."

An Environics public opinion poll for Environment Canada suggested that shareholders favor "social and environmental performance." Of course, the validity of the responses could be questioned because of the desire of those polled to respond in a politically correct fashion, and not necessarily putting their money where their mouths are.

Currently, only 5% of Canadian stocks and 10% of U.S. stocks are considered socially responsible investments.

The issue of whether social values are relevant in asset pricing goes beyond the walls of academia. Legislators formulating economic policies are often required to reflect a society's current value system. In 2003, the California Public Employees' Retirement System (CalPERS) announced that it would no longer invest in developing countries that fail to meet its SRI standards, even if this would shave off three percentage points from the performance of its emerging market portfolios. The Canadian Pension Plan Investment Board also lashed out against executive stock options, putting taxpayers' money where its corporate governance mouth is.

Before 2008, 20 state legislatures have disallowed their state's pension funds from investing in certain terrorism-related regions. More and more nonprofit institutions, such as endowments, foundations, and universities, have declared an explicit position on the issue of SRI in their investment policy statements.

After 2016's infamous Berkshire Hathaway's annual shareholder meeting, the most celebrated investor Warren Buffett was interviewed by a CNBC reporter regarding what he, one of the largest shareholders of Coke Cola (NYSE:KO), thinks of the mountain of complaints that Coke has been a major contributor to the high obesity in the country. Buffett, obviously embarrassed by the question, shoving his shoulders and replied, "Well! I have a Cherry Coke and a donut every morning. If I have a twin brother growing up with me and he hasn't (eating a Coke and donuts), I bet I look better than he does."

At the age of 51, James Gandolfini (Tony Soprano) died of a heart attack on June 19, 2013.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.