While some investors only look for opportunities to make a profit, there are those who also seek companies that align with their ethics. They tend to avoid sin stocks. Sin stocks represent companies that belong to potentially objectionable industries, alcohol, tobacco, gambling, pornography, etc.
“Using your moral compass to make investment decisions may be how you express your sense of ethics,” said Richard Cayne of Meyer International. “But certain sin stocks, if you are willing to take that chance or walk down that road, have proven to be sound investments.”
Sin stocks are subjective
What makes a company a “sinner” is often in the eye of the investor. People who may have no issue with Diageo because they see no harm in alcoholic beverages might object to Ruger because they are staunchly anti-gun. Others may object to any industry that profits from addictive behaviour, from gambling to tobacco.
There are practical considerations when contemplating sin stocks. Very often, they are subject to higher levels of regulation or scrutiny, which may deter certain investors. Tobacco companies had to weather some tumultuous times with regulations as well as lawsuits. However, most of the major players have survived. Some are thriving. So, while these mainstays have been involved and adapting to the changing environment as it happens, newcomers may find it hard to enter the market. With less competition, those already in these sectors can reap the benefits.
And some industries that were once illegal are now represented in major exchanges. The pot industry has gained much credibility over the years as more jurisdictions legalise cannabis for medical or recreational reasons. Between shifting regulations and public perception over the years, marijuana-related companies have seen their value rise as well as fall.
Should you invest in sin stocks?
Some analysts view sin stocks as inelastic. An inelastic product or service’s price does not change its supply or demand. Examples include necessities like gasoline, electricity, and clothing. But this also includes luxury or “sinful” items such as whiskey, gaming, and tobacco. Because there’s always around the same level of demand, many believe that sin stocks are recession-proof and therefore good for the portfolio. Some will go so far to suggest that during rough times people want to escape, so there’s a greater consumption of alcohol, gambling, and the like.
Ultimately, it is your decision whether to invest in sin stocks. Doing your due diligence can help you determine just how sinful a company is and if you have the appetite to invest in them. And checking in with your trusted advisor for a reality check is always useful.