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4 Sin Stocks the Vice Fund Is Betting On - 5668 views
BALTIMORE (Stockpickr) -- Greed is good, according to the nugget of wisdom espoused by Wall Street's Gordon Gecko, which has become such a popular catchphrase for all things Wall Street. But if Gecko sees greed as the road to stock profits, how about some of the other six deadly sins?
It turns out vices aren't just good for Wall Street insiders -- they can be profitable for Main Street mutual fund investors too. Enter the Vice Fund (VICEX), a $76 million fund that bucks the trend of socially responsible investing. Instead, this fund invests solely in sin stocks -- companies involved with alcohol, tobacco, warfare, gambling and the like.
And while the vast majority of investors have taken the moral high ground, those who’ve passed on this fund have missed out on some impressive performance this year: The Vice Fund is up 17.2% year-to-date vs. a mere 3.69% gain in the benchmark S&P 500 Total Return Index.
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Obviously, none of the 34 companies the Vice Fund invests in engage in illegal behavior (they’re publicly traded corporations, after all), but some investors may have moral issues with the kinds of businesses that make up the portfolio. That said, there can be significant advantages to investing in sin stocks. In fact, I’d argue that they should make up a part of any well-diversified portfolio.
One of the biggest draws to this class of stocks is recession resistance; with products such as alcohol and tobacco consumed as much (if not more) during a recession as during a stable economy, these stocks have a fundamental backstop to share price drops.
And although that argument didn’t totally pan out in 2008’s pullback, it’s attributed to the springy rebound this fund has enjoyed in 2009 and 2010. You don’t have to make a deal with the devil to invest in these stocks. Here’s a look at four stocks that the Vice Fund is betting on in 2010.
The biggest position in the Vice Fund’s portfolio (by far) is Philip Morris International (PM), the $108 billion cigarette and tobacco giant that spun off from Altria (MO) in 2008. Philip Morris currently makes up nearly 13% of VICEX’s portfolio, with 165,000 shares held. As the second largest tobacco company in the world (only behind China National Tobacco in terms of scale), PM currently holds 16% of the international market thanks to its premium portfolio of brands, including flagship Marlboro.
Marlboro contributed 35% to Philip Morris’ total sales volume last year, an indicator of the brand’s significance overseas. It also provides the company with an enviable position for the future as consumers in emerging markets trade up their cigarette preferences for more expensive Western brands. Philip Morris has been working hard to capture an increasing segment of emerging markets, where smoking is wildly popular and the firm’s brand equity holds considerable cachet. Partnerships with their biggest rival in China should be an attainable road to growth in the next several years.
Because PM deals exclusively with international sales, the effects of dollar weakening tactics (such as QE2) are actually beneficial. By taking in euros and yuan and reporting its own earnings to U.S. investors in dollars, strong currencies abroad give PM material currency gains and pricing advantages over the competition. With a generous 4.31% dividend yield right now, this company should continue to court investors well.
TheStreet Ratings currently rates Philip Morris a buy, which earns the stock a spot on its Top-Rated Tobacco Stocks list. Other major holders include Carlos Slim Helu and Chris Davis, and the stock was included in a recent list of the Top S&P 500 10 Buybacks of 2010.
While Diageo’s (DEO) performance hasn’t been particularly toast-worthy this year (shares lag the S&P by several points in 2010), this alcoholic beverage giant has nonetheless seen a continued recovery in sales as consumer spending on spirits increased. With brands such as Smirnoff, Johnnie Walker and Cuervo under its belt, Diageo rings in as the world’s largest purveyor of liquors -- and it shows. With a mature distribution network and plenty of capital available for future acquisitions, this stock is worth watching right now.
Even though the recession has squeezed margins and slowed sales in many businesses, Diageo’s best-in-breed U.S. operations have proved to be a saving grace. The company sports much beefier profitability in the U.S. than its direct competitors, the result of mid-premium pricing and a well-conceived distribution chain that maximizes efficiency. Consumer stickiness in the spirits industry has helped as well. Even as consumers cut back on other discretionary purchases, they’re much more likely to continue buying their alcohol brand of choice than downgrade to cheaper drink.
The best thing that Diageo can do for future growth is continue to step up its product portfolio. As consolidation changes the face of the alcoholic beverage industry, the company’s competitors are snatching up the few attractive independent producers left. Diageo will need to keep its offerings robust if it wants to keep its position at the top of the pack.
Wynn Resorts (WYNN) has been enjoying a phenomenal year, built on successes in Macau and a rebound in Las Vegas, sending shares up 71% since the first trading day of January. While less profitable than Macau’s high-end operations, the company’s Wynn and Encore properties in Las Vegas are nonetheless crucial to U.S. investors given the political opaqueness of business operations in China’s -- but investors have been warming to the potential in Macau of late.
That’s because the Chinese city ranks as the world’s largest gaming market -- one that doles out an extremely limited supply of licenses for aspiring casino operators. Wynn’s American-style properties in Macau have proved popular for guests -- and lucrative for investors, generating approximately twice the return on investment of traditional Vegas properties.
None of this comes as a surprise to CEO Steve Wynn, the billionaire casino mogul who took his company public in 2002. In terms of financial health, Wynn is a clear leader in the industry, with a $1.9 billion cushion of cash, and the ability to generate massive piles of cash from its operations. For exposure to the gaming industry, this is the company to watch right now.
As the world’s largest defense contractor, Lockheed Martin (LMT) has long been a large part of the Vice Fund’s portfolio. The $25 billion company is a critical component of the nation’s defense chain, providing major platforms that include the F-22 and F-35.
With defense spending at all-time highs in the last decade, analysts have been anxious over the possibility that Lockheed’s revenue streams will start to dry up as the world leaders start to turn off their spending. But the company has a plan for that.
Lockheed has spent the last several years building its information technology business from a tertiary offshoot to a core competency. The company believes that offering IT services to non-defense government agencies will be its key to growth in the next decade -- and that's likely not far off.
In the meantime, with a 4.28% dividend yield, the company should continue to look attractive to income investors at current levels.
Lockheed also shows up in the portfolios of Chase Coleman at Tiger Global Management and Renaissance Technologies, and Roberto Pedone recently highlighted it as a stock that could benefit off conflicts in Korea.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.