-- Sin is in on Wall Street as investors pick vice over virtue and pour money into drinking, smoking and gambling stocks.
"Socially irresponsible," or "vice" stocks, especially tobacco, are paying off for investors who are focusing on these industries' financial, not social, attributes. Shares of tobacco companies Lorillard, Philip Morris and Altria are up 34%, 29% and 15%, respectively, this year — smoking past the 1% year-to-date gain by the Standard & Poor's 500.
Alcoholic beverage stocks aren't falling off the wagon either. Diageo and Brown-Forman are up 14% and 13%. And gaming stocks such as Wynn Resorts and Churchill Downs are each up 14% — a welcome offset to what's shaping up to be a disappointing year for stocks at large.
"Vice stocks are showing they are a necessary part of a diversified portfolio," says Jerry Sullivan, manager of the Vice fund, which invests in those industries. Fund-tracker Morningstar says it has returned 10.3% this year.
"You have to get beyond the point of saying, 'I don't like this' or 'I don't like that,' " Sullivan says.
Investors are seeing several desirable attributes of vice stocks, including:
•Stability and predictability. Demand for alcohol has remained stable, except for beer which has been declining, says Esther Kwon, stock analyst at S&P. And while demand for cigarettes has been falling, the declines are slow and predictable, she says. Vice stocks are appealing to investors nervous about the stock market and looking for something more predictable, S&P's Sam Stovall says.
•Dividend yields. Investors craving any income in a world of low interest rates can't ignore tobacco companies. Savings accounts generate 1% or less in annual interest at best and the S&P 500 yields roughly 2% in dividends. So yields of 5.7% and 4.7% at Altria and Lorillard are very appealing, says R.J. Hottovy of Morningstar.
•Reasonable growth prospects. While demand for many "vice" products might be stable, if not slighly declining, there are growth opportunities, Hottovy says. In the U.S., there has been growth in demand for smokeless tobacco, he says. For Wynn and other large casino companies, there's untapped demand in Asia, Kwon says. Regional operators continue to expand casinos that go alongside horse racing, Sullivan says. "These companies are not in the business of being liked," he says. "Investors do see them deliver profits and grow."