Is Wal-Mart the Next Altria?

A confession: I love controversial companies. Guns? Booze? Heaters? Bring 'em on.

If you notice, companies that have a hint of controversy about them tend to be priced fairly cheaply. There are a number of reasons for this. Cigarette companies like R.J. Reynolds (NYSE:RJR) and Altria (NYSE:MO) have the potential for substantial litigation losses hanging over them at all times, for example, and casinos like Ameristar (NASDAQ:ASCA) and Mandalay Resort Group (NYSE:MBG) have the rising specter of increased taxation by cash-starved states, as do the hooch companies like Brown Forman (NYSE:BF.B). The "sin stocks" are easy targets, since politicians find it pretty easy to paint them as profiteers.

There's another reason that such companies tend to skew to lower multiples: There are large swaths of the investing public, including institutions, that refuse to own companies engaging in these businesses. Many investors have moral reasons that they will not own certain types of companies, and they don't necessarily have to be in vice businesses.

Muslim investors tend to avoid buying companies that sell pork, and tend to avoid certain types of banking companies. Other investors will avoid companies that operate in certain countries. (Read Paul Elliott's (TMFRael) interview with Calvert Group's CFO for more on socially responsible investing.) There must be a downside to having large swaths of the market completely opposed to owning your stock -- no matter the cost.

And according to at least one analyst, Wal-Mart (NYSE:WMT) -- at a market capitalization of $260 billion, one of the largest companies in the world -- is in danger of becoming so negatively associated in the eyes of investors that it could depress the stock.

Credit Suisse First Boston (NYSE:CSR) analyst Michael Exstein believes that there is a "hostile public environment" surrounding Wal-Mart, and that the company has to do more in order to get out its side of the story. In the last few months, particularly as American manufacturing jobs have dried up in industries that are heavy suppliers to Wal-Mart, the company has become a bit of a lightning rod for the dangers to the local economy of globalization. More specifically, people are critical of its heavy handed relationship with its suppliers and the low wages it pays its employees, plus the effect that the massive stores have had on existing companies in small towns throughout America.

It's an interesting take, seeing that Wal-Mart shares have gained more than 25% in the past year -- which equals a baffling $50 billion in market cap. Companies the size of Wal-Mart simply aren't going to grow very quickly. Its revenues in 2002 exceeded $246 billion, or nearly 2% of U.S. GDP. A quick double, this isn't.

But Exstein does have a point about the negativity surrounding the company. Wal-Mart has numerous benefits that are passed on to consumers that the public may not appreciate. It may be a touchstone at a time when millions are nervous about their jobs, but that doesn't mean that it cannot show that many of the towns in which it operates have enjoyed substantial economic benefit. Exstein wonders, though, whether the retailer might become a victim of its past success, calling on it to change its practices.

But these practices are what made it the largest company in the world in the first place. So while Wal-Mart isn't some sort of self-fulfilling prophesy, such a simple "change how you do X" solution may be substantially worse than having a segment of the population avoid the company's stock.

Seriously, what would be so bad about the stock being a little bit cheap?

Bill Mann owns shares of R.J. Reynolds.