"You will always be fond of me. I represent to you all the sins you never had the courage to commit."
― Oscar Wilde
Why I Love Sin (stocks).
A few weeks ago, I had a reader comment questioning the morality of one of my investments. Jokingly, I responded to look for my next article, "Marijuana, Gambling, and Strip Clubs: Why I Love Sin (stocks)". At the time I was just teasing, but it started me thinking, why not? After all, these stocks frequently have sizable moats, generate strong cash flows, and in fact are some of the best returning stocks I have owned over the years. If nothing else, it's a great chance to stick some salacious pictures in an article (which should be good for few clicks).
So, first a bit of an eye opener. Guess what the top performing stock over the last 5 decades is?
- Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO)? Nope.
- Google (NASDAQ:GOOG) (NASDAQ:GOOGL) or Amazon (NASDAQ:AMZN)? Nada.
- Apple (NASDAQ:AAPL) or Berkshire Hathaway (NYSE:BRK.B)? Net, Nien, Nao, Non (but you are getting closer)
The number one performing stock, up more than 20% annually over the last half century is, drum-roll please... Altria (NYSE:MO). Yep, the company that brings us Marlboro cigarettes. A company that actually contributes to the death of its own customer base, and is reviled throughout the US as promoting a disgusting, poisonous habit, is the highest returning stock over the last 50 years. You might not agree with the ethics of owning such a stock, but it's hard to say it has not been profitable.
You see revulsion, hatred, fear, and disgust can actually be a good thing for long term shareholders. It keeps a company's stock cheap despite superior financial performance. It allows one to re-invest dividends or the company to buy back stock at good prices thereby taking advantage of the 8th wonder of the world, compound interest. It's no wonder many Altria investors would simultaneously love the stock, and highly discourage their loved ones from ever using the product.
This is also a case where cash flow generation matters a lot, and since Altria has a high margin product with low costs and a decent moat, it generates lots of cash flow. It has customers who are literally addicted to its product, so it can keep raising prices without losing too many of them. Those customers also have "their brand" that they have been smoking for decades, a wide moat. Yet Altria's production and R&D costs are very low. Tobacco grows like a weed, and Altria barely has to innovate (vape being the only truly new product development that's happened in the last few decades). The combination of high prices, a wide moat, and low costs, produce huge margins and cash flow.
But this article is not about Altria. I use it merely to make a point, an ethically challenged, reviled stock can be a good thing. It can almost by definition be a case of buying underpriced out of favor stocks. A stock that many shareholders don't want to touch despite great financial performance, is something to look for. One with high margins, low costs, preferably at least somewhat of a moat, and most of all generating significant cash flows. Cash flows which can be plowed right back into buying more cheap shares. This is the stuff dreams are made of.
Marijuana, Gambling, and Strip Clubs: Oh My!
I have bought three multi-bagger sin stocks in the last few years:
Source: ebbu website, ebbu.com
Back when Colorado legalized recreational marijuana, I provided seed money for a marijuana R&D and product startup called ebbu. While ebbu is not public, and therefore I can't definitively say what price it would sell for, the latest equity round does appear to be a multiple of my original seed capital investment. More importantly, I am more than pleased with the 30 marijuana patent filings which have occurred so far. Quite simply, due to marijuana being federally illegal, there has been a severe lack of research in the area. It is uncharted territory. I liken it to the Oklahoma Land Rush of 1889, only instead of being limited to placing a claim on only one quarter-section, they get to plant their flag on as many unique patents as they can find.
A couple years ago I encouraged people to, " Throw the Dice with Eldorado Resorts (NASDAQ:ERI)", a $5 gaming stock based out of Reno, NV. Few read the article at the time. The company, a small little sin stock that did not even have a casino in Atlantic City, much less Las Vegas or Macau, was not well followed. When the stock briefly dropped into the mid-high $4s following that article, I received my first three comments: "better entry point today? ouch...", "TPCA is a better value in all facets..", and "entry point gets better every day, so it seems". So, the stock remained both under-followed and unloved, exactly what I look for. Even a year later, with ERI above $10, when the editors at Seeking Alpha recognized my follow up article, "The Winning Streak Continues At Eldorado Resorts" as a must read, few did. Yesterday, ERI broke $20 per share, a 4 bagger. Maybe not quite the under-followed, unloved, deal it used to be, but still a decent investment if you ask me.
Source: RCI Hospitality website
I was somewhat surprised to realize I never wrote an article on RCI Hospitality (NASDAQ:RICK). RCI is a relatively small, and certainly unloved strip club and breastaurant operator which I have owned for years (since back when its market cap was well under $100 million). There have been a number of articles on it, Detroit Bear has been covering it for a while. However, I find it rather telling that when he wrote, "RCI Holdings Is Finally a Deal", with the stock in the mid $8s, there were less than 10 comments. I suspect despite all the articles, few are listening. I wonder for instance how many clicks or readers Detroit Bears article received.
As I said, I was surprised to realize I had never written an article on RICK, it is in fact not only a multi-bagger for me but also my largest buy and hold type position. I can only surmise I had written so many long comments to others articles, that I subconsciously thought I had actually written one myself. I will seek to rectify that situation soon.
In the meantime, the point is not to buy RICK, or ERI, or ebbu (accredited investors only). The point is the greatest value readers can get from Seeking Alpha is the uncovering of small, unloved, under-followed stocks. It's not the Tesla (NASDAQ:TSLA), Exxon (NYSE:XON), and Johnson and Johnson (NYSE:JNJ) articles which are going to uncover hidden value. It's the articles about companies you never heard of before, with few comments, that don't trend in the top 10, where you are going to find real value.
That and of course, a little bit of sin, can be a good thing.
Disclosure: I am/we are long RICK, ERI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article covers several highly speculative investments. I do not know you: your goals, risk tolerance, or particular situation. Therefore, I can not recommend this or for that matter any investment to you. Do your own due diligence.