Consumers buy products and services. Most of the time, they are good for us and necessary for life. A house, a car, food, clothes, utilities. All of these are essential for living the modern life. But sometimes we like to indulge a little. Sometimes, we enjoy doing something a little more naughty and a little less nice. Publicly traded companies that sell those “vice” products are called sin stocks.
“Sin stocks” is a term people use to describe companies whose products or services that are highly controlled and sometimes even controversial. Traditionally, the term has referred to companies that sold tobacco products, alcohol, weapons, and gambling services. Some examples include:
- Cigarette manufacturers
- Gun manufacturers
- Adult entertainment
Although that is the traditional list of sin stocks, a sin stock is really any stock that has to do with some kind of vice. Other kinds of sin stocks include stocks of companies that profit from crime (such as prison operators) or who provide so-called “mercenary” services (such as some of the Private Military Companies operating today).
Analysts debate whether or not sin stocks have better returns than other kinds of stocks (“non” sin stocks).
Some argue that these stocks do have better returns because people love these products or services and will often pay for them regardless of price and even in harder economic times. For example, you rarely see a smoker cutting back on buying cigarettes because of the economy. So these analysts make the argument that sin stocks are recession proof or, at least, resistant to economic pressure.
Other analysts argue that the underlying products or services are commodities, just like everything else and they are prone to the pressures of economic hardship just like everything else. Furthermore, some analysts point out that these stocks come with an additional risk – the risk of being controlled even more tightly so that the companies cannot operate profitably. (Prohibition is an example of this occurring in the past). Additionally, some would argue that there is a moral risk as well and some people won’t hold these stocks in their portfolio for moral reasons.
Whether they are recession proof or they just happen to have a large and loyal following of customers, or whether they are risky and amoral, investors should examine their portfolio to decide if a sin stock is something they want to own. Investors who are looking for a different kind of investment and are thinking about sin stocks will want to take a closer look and do their own due diligence to determine if sin stocks are right for their portfolio.
Just like any other business, check for some of the following things:
- A strong balance sheet and good cash flow
- Experience leadership who have a good plan for the future
- A product that has a loyal customer-base and is likely to remain in demand
Sin stocks aren’t right for everyone but you might find that they make a nice (but naughty) addition to your stock portfolio.