Daily Gains Letter

Sin Stocks Posting Impressive Gains in Struggling U.S. Economy

By for Daily Gains Letter |

Why Sin Stocks Are Where the Money Is in This Stock MarketAs the investing adage of the day goes, “When the going gets tough, the tough get eating, smoking, and drinking.” And there’s plenty of tough economic data out there to send people into the arms of their favorite vices and sin stocks.

In a nutshell, U.S. unemployment has improved year-over-year to 6.7%, but the improved numbers are the result of an increase in low-wage-paying part-time retail jobs. The underemployment rate remains high near 13%, as does the long-term unemployed at 2.3%. And despite the soaring S&P 500, wages haven’t really budged in years.

In January, new orders for manufactured durable goods fell one percent, or $2.2 billion, to $225 billion—the third decrease in the last four months. Not surprisingly, retail sales, which account for about 30% of consumer spending, rose just 0.2% in February after two straight months of declines.

March consumer sentiment data missed forecasts, falling from 81.6 in February to 79.9—the lowest level in four months and the eighth miss in the last 10 months. This trickled down to February auto sales, which flat-lined year-over-year to 1.19 million and sat on the low end of annualized auto sales estimates of 15.34 million. Even January housing data were weak.

I realize most economists are blaming the weak U.S. economy on the bad winter weather, but I’m not so sure. And I’m certainly not alone. Even Stephen Poloz, the governor of the Bank of Canada, says it’s hard to believe that the recent economic slowdown is all due to the weather. (Source: “Loonie falls on Stephen Poloz’s gloomy forecast for growth,” The Canadian Press, March 18, 2014.)

The tough economic climate may be cutting into our discretionary purchases, but it hasn’t stopped us from gambling, smoking, or heading out for some nightly entertainment. In fact, the prolonged economic downturn may be giving us more reason to indulge. That makes so-called sin stocks an interesting play as the U.S. economy struggles through the remainder of winter…and maybe even after the weather warms up.

Now I understand sin stocks are not for everyone, especially those investors who espouse socially responsible ethical investing. For those that are more interested in the bottom line, sin stocks are highly profitable. For example, the average cost to produce a pack of name-brand cigarettes is $0.10, or less than one cent each, but they cost the consumer much more, making margins in this business rather lucrative. And everyone knows the house always wins when it comes to gambling.

Speaking of gambling, Melco Crown Entertainment Limited (NASDAQ/MPEL) is a sin stock with operations in Macau, China—a small peninsula that brings in more than seven times the gaming revenue of Las Vegas, which is much larger. This sin stock is up 139% since the beginning of 2013.

The demand for sin stocks like guns continues to be strong, and Smith & Wesson Holding Corporation (NASDAQ/SWHC) has been reaping the rewards. The company reported solid third-quarter results and is up almost 60% since the beginning of 2013.

One sin stock that seems to be floating under the radar is Advanced Cannabis Solutions, Inc. (OTCBB/CANN). Based out of Denver, Colorado, Advanced Cannabis provides services including commercial real estate and equipment to licensed marijuana businesses. Colorado became the first state to open up for adult use retail sales in January 2014; Washington starts in mid-2014.

Clearly, investors think real estate to grow pot is the future, as Advanced Cannabis Solutions is already up more than 1,000% since the beginning of 2014.

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