It is well-known on Wall Street that 'sin stocks' tend to outperform over significant periods - a reality borne out by evidence from a study performed by two economists in 2009. The reasons are not exactly clear. Some analysts point to social taboos against sin stock investing and risk premiums from lawsuits and regulatory scrutiny. Others cite the fact that businesses engaged in vice are simply more profitable.
Even in today's bull market, a number of these sin stocks are trading at the lowest prices seen in years. Others continue to advance while flying under the radar, unappreciated by most investors. This article suggests several downtrodden and undervalued companies in the tobacco, alcohol, sex, and gambling sectors worthy of consideration.
Despite smoking rates peaking in the 1960s, Big Tobacco stocks have crushed the market due to immense pricing power and inelastic demand for their products. In 2015, Credit Suisse's study of stock market returns showed that just one dollar invested in tobacco in 1900 would have grown to $6.3 million by 2010.
Over the last decade, investors have piled into cigarette producers such as Altria (MO) and Philip Morris International (PM), driving up price-to-earnings ratios to historically high levels. As a result, shares have underperformed over the last two years. Altria is off 20 percent from its 2017 peak, while Philip Morris is down nearly 30 percent.
Smokeless tobacco producers, on the other hand, have surged. Shares of chewing tobacco giant Swedish Match (OTCPK:SWMAY) are up 37 percent this year, bringing the P/E to 23 times earnings. Small-cap U.S. firm Turning Point Brands (TPB), which runs an asset-light operation and is majority-owned by conglomerate Standard Diversified (SDI), has doubled in value this year.
For readers who want a more in-depth look at SDI, my June 2018 article on this curious holding company is available to non-subscribers as an "Author's Pick."
Perhaps cigarette stocks were slightly overvalued, but the correction seems overdone. Meanwhile, smokeless tobacco firms like TPB remain underfollowed (and undervalued) by Wall Street.
Had it not been for Prohibition, it is possible that booze - not cigarettes - would have dominated the 20th century as America's greatest growth industry. Like tobacco, alcohol stands out for the non-cyclical nature of its business.
However, the stock prices of several Big Beer firms have fizzled amid price competition and waning consumer enthusiasm for 'macro' brews. Anheuser-Busch InBev (BUD) and Molson Coors (TAP), the nation's two largest brewers, are down 36 percent and 46 percent, respectively, from all-time highs set in late 2016.
Both companies ballooned in size after ABI bought out SABMiller for $107 billion in October of that year, which also resulted in Molson Coors agreeing to acquire the latter's stake in the MillerCoors joint venture. The need to service debt from the deal, though, has sparked concern about the companies' ability to raise dividend payouts and make future investments.
Like Big Tobacco counterparts, Big Beer's valuation shot up in the first half of the decade as investors reached for safety and yield. With enthusiasm in the dumps, now is the time to take a second look.
As the old marketing adage goes, sex sells - and investors might want to buy.
Shares of Rick's Cabaret (RICK), the only publicly-listed strip club operator in the U.S., have surged 140 percent to $27.50 over the last two years as the company continues opening new clubs and rolling up mom-and-pop establishments in core markets. Westpark Capital analyst Ishfaque Faruk, who presciently called for a 60 percent rise in March 2017, reiterated his 'buy' rating last July with a $34 price target.
Last year Rick's earned $8 million on sales of $145 million, with a return on equity of 6 percent. The stock currently sports a P/E of 12.
Another area ripe for investment is online dating, specifically market leader Match Group (MTCH) and its parent company InterActiveCorp (IAC). Match owns a large portfolio of dating sites, including crown jewel Tinder, the millennial-focused app best known for facilitating casual flings. Monetization efforts have proven widely successful over the last three years, and Match's annual earnings have more than quadrupled to $500 million. More revenue is sure to come as Match continues rolling out new features for Tinder, acquiring rival sites, and growing its user base.
Like the gamblers themselves, the fortunes of casino operators always seem to soar one moment before crashing the next. Just as the pain from the Chinese government's crackdown on Macau seemed to abate, investors were jolted by a surprise slowdown in Las Vegas.
This year, casino stocks have been on a decisive losing streak. MGM Resorts (MGM), Las Vegas Sands (LVS), and Caeser's Entertainment (CZR) have all shed a third of their value. Wynn Resorts (WYNN) is down more than 40 percent from its high, the company's sales woes compounded by former CEO Steve Wynn's sexual misconduct scandal.
That said, Sin City has always managed to bounce back from downturns. As David Schwartz writes in Forbes, Vegas has gone through several transformations and rebrandings since the 1950s. Now might be a good time to place your bets.
Disclosure: I am/we are long TPB, SDI, MTCH. 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.