A Fresh Look at Sin Stocks

The negative press surrounding sin stocks -- companies dealing with alcohol, tobacco, firearms, or gambling -- doesn't necessarily translate into subpar returns for investors. Some great investing minds have argued that bad news tends to keep share prices artificially low, rewarding shareholders over the long run.

Over the past five years, for example, The Vice Fund (VICEX), which invests in sin stocks, has outperformed the socially responsible Vanguard FTSE Social Index (VFTSX) by a double-digit margin per year.

Now's as good a time as any to give sin stocks a fresh look, with a little help from the 100,000 investors participating in Motley Fool CAPS.

Time to indulge?
Even though human beings succumb to bad habits regardless of market conditions, some sin stocks haven't been able to escape the recent market decline.

Company

% Below
52-week High

CAPS Rating
(out of 5)

Anheuser-Busch (NYSE:BUD)

10.0%

****

Carolina Group (NYSE:CG)

30.4%

***

Constellation Brands (NYSE:STZ)

29.8%

****

Smith & Wesson (NASDAQ:SWHC)

69.1%

****

Boyd Gaming 

65.5%

****

Source: Yahoo! Finance as of May 1, and Motley Fool CAPS.

This type of decline in defensive stocks, especially amid recession talk, is generally music to risk-averse investors' ears. It means they can pick up stocks with steady business prospects at a discount.

Motley Fool Income Investor co-advisor James Early recently did exactly that, recommending Santiago, Chile-basedCompania Cervecerias Unidas S.A (NYSE: CU  ) to Income Investor subscribers. At the time, the combination of a 3.6% dividend yield, a proven defensive product line (beer, soda, etc.), and a P/E of 16 was simply too good to pass up. Shares of Compania Cervecerias have since gained 10%.

Backfire at Smith & Wesson
Shares of gun maker Smith & Wesson soared in 2007 following its acquisition of Thompson/Central Arms in January of that year. But more recently, the stock has soured following a series of disappointing earnings reports.

One of the biggest culprits has been ballooning unsold inventory, which swelled by 51% in the most recent quarter. A combination of factors has been at work here. For one, this winter was unseasonably warm across most of the country, shortening hunting seasons. And since the rest of the industry had also expected greater sales, a glut of guns ended up sitting in warehouses waiting to be sold. In addition, when economic times get tough, as they have been in recent months, hunters may stick with the guns they already own until they have the money to shop for a new one.

CAPS investors are fairly sure that the worst is behind Smith & Wesson, believing that now is the time to buy the beaten-down stock. Of the 553 players who've rated the stock, 517 (93%) think it will outperform the S&P 500 going forward.

In a recent pitch, TMFSarahGen argued that the recent downturn is over:

SWHC has bottomed, and it's way safer than my other favorite gun stock, RGR, because a giant percentage of their sales are to military and police-sales that will not go away and do not depend on the consumer.

Talk about being able to call a bottom -- Smith & Wesson shares have surged 47% since TMFSarahGen made her pick in mid-March.

What do you think? Is it time to pull the trigger on Smith & Wesson, or will added inventory only increase a misfire? Voice your opinion on this stock, or any other for that matter, on Motley Fool CAPS right now. 100,000 investors are waiting to hear what you have to say.

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