The Market's Most Sinful Stocks

I don't smoke. In fact, I suggest that my friends who smoke quit smoking.

Why do I lead with that? To be upfront about an apparent contradiction: Philip Morris parent Altria (NYSE:MO) has been a three-bagger in my portfolio, my most successful foray in the public markets.

I bought Altria shares a few years back, when it was in freefall because of litigation concerns. The fundamentals were there, it seemed to me, even if the company had to pay settlement claims. (Altria sits on piles of cash, so it's suited to deal with such events.)

Vice or virtue?
The same dilemma that troubled me seems to plague many individual investors -- I found a promising investment, but it was a company that does something questionable (in this case, sell cigarettes). But tobacco is a legal enterprise in a capitalistic society, so I made my purchase.

For investors who made a similar decision over the years, Altria has proved rewarding. According to Jeremy Siegel, Altria was the best-performing stock of the past 50 years, perhaps partly because it never got too expensive.

As Siegel writes in The Future for Investors: "In the capital markets, bad news for the firm often is transformed into good news for investors. Many shun the stock in the company [Altria] and fear that its legal liability for producing a dangerous product -- cigarettes -- will eventually crush the firm."

In other words, many investors tend to overreact to bad news about a company, consequently pushing its stock price down. This leaves value investors with good buying opportunities.

Turn bad news into good news
During a more recent slice of history (the past five years), so-called sin stocks have continued to scorch the market.

Just look at the performance of the Vice Fund (VICEX). According to its latest annual report, the fund invests 95% of its assets in four sin sectors: alcoholic beverages; aerospace and defense; casinos, gambling, and lotteries; and tobacco. Since inception in August 2002, Vice Fund has outpaced both the S&P 500 and its counterpart, the "socially responsible" Calvert Social Index Fund (CISIX). The fund's top holdings are a who's-who of sin stocks:

Now, I'm not suggesting you go buy shares of Vice Fund. It charges a hefty 1.75% expense ratio, and although its past performance may warrant the higher-than-average price tag, no one can predict what future performance will be. But I think the Vice Fund's mission is worth pondering.

Don't close your mind to investment opportunities
Many funds and individual investors have shunned sin stocks in the past (e.g., Altria) and will continue to do so in the future.

Great stocks come from all corners of the market, so you don't have to go against your personal beliefs to find great values. However, you do have to be willing to go against the thinking of others, even if those others work for huge Wall Street firms or have MBAs. And -- here's the kicker -- you have to do your research.

The Foolish bottom line
Ay, there's the rub. If you're like me, your deadly sin of choice is sloth. Reading a ton of quarterly filings and listening to just as many earnings calls to find a few great values sounds a lot less appetizing to me than catching up on my Netflix queue.

Fortunately, our resident value guru, Philip Durell, lives for this type of research. Philip goes where the values are -- of the stocks mentioned above, he's recommended Anheuser-Busch to Motley Fool Inside Value subscribers as a value worth pursuing. You can see all of Philip's value ideas for free with a 30-day trial.

Whatever you do, just remember: You never know where the market's values lurk, so keep your eyes open.

Fool analyst Anand Chokkavelu does not own a lighter, but does own shares of Altria. Shuffle Master is a Motley Fool Stock Advisor selection. The Fool's disclosure policy is ironclad.