|Kiplinger.com, Spring, 2018. This article was written with Ken Berman, founder of Gorilla Trades. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Berman as a contributor and to deliver original articles for them on a regular basis.|
Sin stocks – shares of businesses that make weapons, operate casinos, brew beer and grow tobacco, among other activities – are immoral and don’t merit their precious investment dollars.
However, these stocks have the potential for massive outperformance, and many have – sometimes spectacularly.
In some cases, sin stocks are attractive because their businesses are recession-proof. Alcohol, for instance, lubricates in good times and in bad – when things are well, people celebrate with alcohol, and when they’re not, that same alcohol is used to forget that things aren’t so grand. In fact, some sin-stock industries are actually in the consumer staples sector because they’re considered just as essential as toilet paper and canned food.
One particular type of sin stock – gun companies – is on the ropes right now, with banks cutting ties to companies that produce guns, and fund providers finding ways to allow customers to avoid investing in these stocks. However, numerous other vice industries warrant a look right now.
If you can’t let sin stocks into your portfolio, stop reading. If you can, though, read on to learn about five stock picks that are so “bad,” they’re good.
- Market value: $121.7 billion
- Dividend yield: 4.1%
Despite a sustained assault on smoking in the U.S., longtime investors in Altria (MO, $64.22) have done awfully well for themselves, regardless of whether they got in before or after the 2008 spinoff of Philip Morris International (PM). And although MO has suffered declines over the past year or so, investors are set up for better things ahead.
The company behind Marlboro and Virginia Slims grew profits 11.9% on an adjusted basis last year, and analysts at Bank of America/Merrill Lynch expect Altria to enjoy another bout of low-double-digit earnings growth this year, driven by cost-cutting and price hikes. But there’s growth in Altria’s future, too. The company’s smokeless products are gaining traction; its flagship e-vapor brand MarkTen grew volume by 60% last year, and the product now is available in 25,000 retail stores.
Altria also has been able to fight through America’s crackdown on smoking to maintain its status as a Dividend Aristocrat, raising its annual payout for 49 consecutive years. That includes a 6% hike announced March 1. Better still, its projected annual payout of $2.64 per share is just two-thirds of the $3.98 in profits analysts expect for this year, meaning the payout is well-covered and likely to grow more in the future. (Bank of America analysts are even more optimistic than the consensus, expecting tax-reform savings to push that earnings number to $4.01 per share this year.)
Altria’s combination of strong cashflow from traditional tobacco combined with its potential in the smokeless space makes MO a winner.
(2/5) Constellation Brands
- Market value: $43.7 billion
- Dividend yield: 0.9%
- Constellation Brands (STZ, $226.07) is a global marketer and producer of beer (including Modelo and Corona), wine (including Robert Mondavi and 7 Moons) and spirits (including Svedka vodka and Black Velvet whiskey). STZ is the biggest importer of beer by revenue and is third in market share.
The upside in STZ shares may be in the changing demographics and tastes of its customers. Prior generations started and generally stayed with beer, while the millennial generation reaches for beer, wine and spirits alike. According to the analysts at Merrill Lynch, those consumers spend roughly six times more than consumers who stay in a single beverage category. That’s good news for Constellation, which participates in all three segments. And more broadly speaking, the alcoholic beverage industry is among the few consumer staples areas that continues to grow.
But perhaps the most exciting prospect for Constellation is in another “sin” business: marijuana. The company acquired a nearly 10% stake in Canadian marijuana company Canopy Growth (TWMJF) in October 2017. Marijuana is expected to be legalized nationally sometime this year, and Constellation even plans to work with Canopy to develop a beverage that contains marijuana.
- Market value: $20.3 billion
- Dividend yield: 2.7%
You probably don’t lump Herhsey’s Kisses in with beer, cigarettes and military tanks. But venerable confectionery Hershey (HSY, $95.86) is increasingly being thought of more negatively because it deals in sugary treats – a growing area of concern of health advocates.
That seemed to be the story told by the company’s fourth-quarter earnings miss, which sent shares tumbling in early February.
But that’s good news for new money. That’s because Hershey is expected to keep on growing, with analysts projecting a nearly 6% bump in revenues this year, feeding a 13% improvement on the bottom line. And thanks to the dip, HSY appears very reasonably priced at less than 17 times the consensus earnings estimate for next year’s profits.
Also attractive is Hershey’s stance on the stock-buybacks front. At the end of 2017, HSY added $100 million to its $250 million program authorized in 2015.
(4/5) MGM Resorts International
- Market value: $19.5 billion
- Dividend yield: 1.3%
- MGM Resorts International (MGM, $34.67) is a leading hotel and casino company. It has 10 properties on the Las Vegas Strip, as well as properties in Illinois, Maryland, Mississippi, Michigan and elsewhere in Nevada. Moreover, it also has a presence in China’s Macau – the largest gaming market in the world.
Analysts like MGM right now because it offers the possibility of organic growth from its existing properties, as well as new growth from the $3.4 billion MGM Cotai, a long-delayed Macau project that finally opened in February, and the MGM National Harbor near Washington, D.C., in late 2016.
One of the sunniest signs of management’s optimism was the regular dividend started in 2017. The company rolled out an 11-cent quarterly payout starting early last year, then raised it 9.1% to 12 cents per share in 2018.
- Market value: $63.5 billion
- Dividend yield: 1.5%
- Raytheon (RTN, $218.11) is the world’s largest manufacturer of guided missiles. A large backlog of orders, as well as strong demand for Raytheon’s Patriot missile defense system, set the stage for significantly better operating performance going forward. Foreign orders are projected to exceed $8.5 billion, or about a third of total revenues, with international growth continuing into 2020.
Analysts at Wells Fargo expect organic growth in bookings at Raytheon to increase 4% to 6%, but increases in the defense budget could mean even more upside to these estimates. There’s also additional potential for Raytheon in the very near-term, as increased tensions in Syria could drive additional military demand.
The case for Raytheon is not just growth. The stock has some, ahem, defensive elements to it. A wide array of defense programs in its portfolio dampens the risks attributable to delays and cancellations. Moreover, while the dividend on RTN shares isn’t exactly robust, at 1.5%, dividend growth has been – the company has increased its payout more than 40% in the past five years.