By Josh Kincaid
Protecting your portfolio during economic uncertainty with sin stocks
Sin clauses, SRI and ESG may come at a financial cost
Sin stock’s benefits in addition to being recession-proof, generating strong and consistent earnings, and having limited competition
Historical evidence on the performance supports sin stock’s higher alpha
Sin stocks plausible underperformance due to “shunned-stock hypothesis”
Vice Stocks AKA Sin Stocks
During my career in finance, I’ve been hearing investors say that vice stocks, AKA sin stocks, tend to outperform blue-chip stocks during a market downturn.
Sin stocks refer to shares of public companies whose business is considered unethical, immoral, or unsavory. Traditionally, the term's been applied to alcohol, tobacco, gambling, and defense.
Now that cannabis stocks are included in this segment, I was curious if more investors should be seeking alpha in sin stocks.
In order to get some more clarification on the subject, I reached out to an expert in this field- Larry Swedroe, who in August 2020 wrote the article “Sin Stocks And Expected Returns” which prompted me to seek out an interview with Larry for my cannabis business podcast “The Talking Hedge” to get into the weeds regarding sin stocks.
According to Larry “sin stocks are considered to be fairly recession-proof. There’s a reason for this- people drink, smoke, and gamble in both good times and bad, while most of them don't view their own "sins" as discretionary. One theory for sin stock’s higher returns is they are more profitable and less wasteful with investment. This is due to the difficulty this sector has when it comes to raising capital, so companies don’t tend to waste it.”
Larry goes on to say “sin stocks are considered defensive and tend to remain fairly stable under difficult economic conditions. They tend to suffer only when economic conditions are so bad they impair consumers' ability to spend. However, consumers typically revert back to their vices once the economy improves, and they tend to spend aggressively during bull markets.”
Sin Stock Price Discovery
Prior to my research on sin stocks, I was under the impression the reasons for above-market returns was due to the demand for their products being inelastic.
After further research, sin stocks are in part systematically underpriced because of institutional investors' inability to buy them due to sin clauses, as well as those who lean toward the side of Social Responsible Investing (SRI) or Environmental Social Governance (ESG). These investors express their values through their investments and believe sin industries could benefit from …