Do you fancy sin stocks, perhaps?
Last week I covered righteous companies that were cashing in on the religious revolution in my God, Inc. article. Since I didn't receive any hate mail from fundamentalists or agnostics, I'm guessing it was a pretty objective piece. Either that or some of you decided to turn the other cheek. I appreciate that.
In the spirit of equal time, though, I figured that I would devote this column to the dark side. Yes, that's right, the Sith Lords of Commerce. The public purveyors of spiritual pestilence. Don't try sneaking your way out of this, Altria
However, above and (more so) beyond Philip Morris version 2.0, it's highly unlikely that we will all be able to agree on what constitutes a sin stock. Is a defense contractor a killer or a keeper of the peace? Is a casino operator a harvester of gambling addiction or is it an employer and entertainment provider?
If you look hard enough, every company will eventually dip into the cesspool of what someone somewhere would consider a morally bankrupt entity. So let's get that out of the way. Mickey D's is evil because its greasy grub causes coronary heart disease. The Detroit automakers are bad boys because they create the machines that cause roadside fatalities. There's no point in nitpicking. Every stock is evil. However, I'm going to tackle the more conventional sin stocks this time.
Up in smoke
Get back in here, Altria. As the world's largest tobacco company, Altria's got it going on with the Marlboro Man. The company has stakes in Kraft and Miller Brewing, but it's Altria's cigarette business that fuels the company's bottom line. There is clearly a downside to peddling "cancer sticks." The company's products are taxed heavily and its legal staff is perpetually attempting to stave off costly lawsuits. It is also highly regulated. When you see a tobacco company like Altria pay to put out a television commercial to tell young people not to smoke, you know you have problems. It's like McDonald's having to produce a spot asking kids to go for a salad next time and skimp on the Happy Meals.
However, there is also the financial upside to pushing something so addictive. For instance, over the past year the stock has risen by 60%. However, thanks to Altria's higher profit guidance over the summer, the stock is only trading at 14 times this year's earnings. It's made some acquisitions overseas to make it an even more dominant global player.
Costly litigation will probably always be a dark cloud hanging over the company given all of the tobacco-related deaths. You also have some investors who wouldn't buy Altria at any price -- like my wife, who spent a few years working for the American Cancer Society and allows me to manage her portfolio, as long as I never go near Big Mo. However, the faith of those who believe in Altria is rewarded with fat quarterly dividend checks. The stock presently yields a whopping 4.3%.
Buying the next round
Liquor is another active sin stock area. Might as well kick things off with a shot of the hard stuff. Jack Daniels? Southern Comfort? Finlandia vodka? That's all the bottled handiwork of Brown Forman
Last month, Brown Forman posted fiscal first-quarter results worth toasting. Earnings from continuing operations rose by 45%. The stock is selling at a higher multiple than Altria -- at 22 times this year's income projections -- but it doesn't come with the same overhang of legal liabilities.
On the beer front, it's hard to look past Anheuser-Busch
Reach for the sky
Investors who got trigger-happy and bought Smith & Wesson
That brings us to pornography. Yes, there are publicly traded companies that dabble in adult entertainment. No, their annual reports don't come wrapped in brown paper bags. New Frontier Media
And, yes, there is even a public strip club. Rick's Cabaret opened its 10th club this week, this one in midtown Manhattan. The company's founder sold off his baseball card collection for $40,000 16 years ago to buy his first topless club at the "just legal" age of 21. I guess you can say that he traded one Babe for a bevy of others.
Rick's Cabaret also runs some adult websites, including an auction site for adult products, but the company's online endeavors make up just 5% of the company's total revenue base.
Into the confessional
Did any of these stocks intrigue you? Were you aghast that as an investor one can profit from debauchery? Obviously these are ethical questions that you -- and only you -- can answer.
I would like to channel the David Gardner of 1997 for some perspective, though. In May of that year, he wrote about the dilemma of buying into Altria -- Philip Morris before the moniker masquerade.
"What I've always said is that if you can't beat 'em, join 'em," he wrote at the time. "Philip Morris investors have made tons of money off of the stock, historically, far outperforming any socially responsible mutual fund I've seen. So consider buying the stock yourself -- don't let them get all the profits -- then, if you feel strongly enough about it, donate all or a portion of your profits to fight tobacco. Makes some Foolish sense to me."
It's definitely a neat way of looking at it. These days, David still thinks that some rules can use a little breaking. Motley Fool Rule Breakers is a premium newsletter service that seeks out ultimate growth stocks, just as they are starting to disrupt their sometimes sleepy sectors. They're not all choirboy picks. One of the earlier recommendations was for a maker of next-generation weaponry. Other industry-altering upstarts include a high-end jeweler, a breakthrough flower delivery specialist, and a market-thumping spa operator. Put them all together and you have one costly affair.
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Let thy investor without sin, cast the first sin stock.
Longtime Fool contributor Rick Munarriz is probably never going to be up for sainthood, but he is, pretty much, a goody two-shoes -- even when he's barefoot. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
