‘Sinvestments’: Investing in Low Morals for High Profits

November 24th, 2015   •   no comments   
‘Sinvestments’: Investing in Low Morals for High Profits

From cigarettes to casinos, sin pays if you buy in wisely. But vice isn’t always nice to investors.

There’s one type of lucre-laden sin that Michael Douglas made famous in the movie “Wall Street” through an infamous quote: “Greed is good.” But you don’t have to be greedy – and, in fact, you can be a conventional investor with modest goals – to get involved in sinful business of another sort.

“Companies that make up the vice industry – alcohol, tobacco, firearms, adult entertainment and gambling – can make up a portion of an investment portfolio as long as the client understands the risk associated involved,” says Peter Frawley Sr., vice president of CoreCap Investments in Southfield, Michigan.

Some of those risks involve knowing the legal landscape, says Aaron LoCascio, CEO of VapeWorld, a company that distributes marijuana vaporizers. The vaporizer and e-cigarette markets, he estimates, are about a third of the way up their projected growth slope. The potential gains, he notes, are “immense,” yet “in an emerging industry that’s regulated state by state and nation by nation, you have to have the know-how to navigate the regulatory landscape.”

And, of course, there’s also a nontraditional investment risk question: “What will the neighbors think?” Still, if you’re ready to roll the dice, take into account these eight sectors and factors before you place your bets on “sinvestments.”

Casino gaming: Even money? Take it from an investment advisor based in Las Vegas to know the ups and downs of the casino gambling industry. “Las Vegas continues to slowly improve but Wynn Resorts and the Las Vegas Sands – two of the largest casino companies – get the majority of their revenues, cash flow and profits from Macau and Singapore,” says Yale Bock, founder and president of Y H & C Investments. And Macau has recent cracked down on corruption involving high rollers, which drove the island’s revenues down significantly. “My own opinion is the larger opportunities lie in smaller companies, which may be potentially in the midst of a change in their business,” Bock says.

Online gaming: Double down. As with so many brick-and-mortar business sectors moving to the Internet, online gaming represents a growth category to watch. “These assets are currently undervalued as U.S. regulation is happening at a slower pace than analysts had predicted,” says Jim Ryan, CEO of Pala Interactive, a company that was approved in November to run the online gaming site PalaCasino.com in New Jersey. He predicts nationwide regulation will happen over the next three to five years.

Alcohol: Raise a toast. Not all alcohol companies are alike, but shares of Diageo (symbol: DEO) have nearly doubled over the past five years and currently trade at about $115. “Diageo’s international presence commands respect,” says Victor Chiu, business development manager at Centaria Properties in Vancouver, British Columbia. “It owns hundreds of premium brands like Johnnie Walker, Tanqueray, Gordon’s, Smirnoff and Guinness.” He also sees booze companies as recession-proof for an interesting reason. “When the economy is good, people spend their money to drink and smoke, and when the economy is not so good, people have more of an excuse to drink and smoke,” Chiu says.

Tobacco: Up in smoke or smokin’? On one hand, tobacco stocks are trading at a premium because the stigma associated with them has created value pricing, says Charles Sizemore, founder and chief investment officer at Sizemore Capital Management in Dallas. Additionally, Chiu remains bullish on big companies such as Philip Morris, the international presence of Altria (MO), as overseas cigarette markets expand, especially in China. But a tightening regulatory noose in the U.S. has hurt sales over time, says David Hagenbuch, a professor of marketing at Messiah College in Mechanicsburg, Pennsylvania, and editor of MindfulMarketing.org. “Furthermore, it’s widely recognized that millennials want to work for organizations that make a positive impact on our world. This significant trend also paints a bleak financial picture for sin products such as tobacco,” Hagenbuch says.

Firearms: It takes target practice. The Second Amendment continues to hold sway in the U.S., but that doesn’t mean such investments are bulletproof. “Whenever speculation of tightening gun laws arises, companies within this industry can significantly fall in value in short periods of time,” Frawley says. “There can also be strong recovery once the pending restrictions do not come to fruition.” With a Republican-controlled Congress (along with the prospect of a Republican president in 2016), count on this sector to resist the outside pressures of increasing regulation.

Adult entertainment: Mixed X-pectations. RCI Hospitality Holdings (RICK) is one company Bock points to in this sector as the largest owner of strip clubs, nightclubs and adult entertainment websites. Yet size isn’t everything, so to speak, as the stock is only up slightly since mid-August 2014. RCI, which runs gentlemen’s clubs primarily in Texas, has struggled with debt load, but is in a position to grow should it continue its history of acquiring more adult properties.

“Vice” versa? You may be just fine investing in the marijuana sector but have problems in other areas where the meaning of “vice” is altogether different. So be sure to ask the right questions, Sizemore says. “Is McDonald’s bad for selling fatty hamburgers to children? Is Wal-Mart bad for paying low wages and driving mom-and-pop local stores out of business? Is Monsanto bad for selling genetically modified seeds or driving a hard bargain with farmers?” In fact, Monsanto was voted the Most Evil Corporation of the Year in a 2011 poll of more than 16,000 readers on the Natural News website, finishing with more than half the votes.

The wages of “sinvestments.” Just because a company engages in a controversial world of muddy morals doesn’t mean you can blur the line of business ethics or reprehensible morality. “We shouldn’t invest in companies that we suspect are breaking the laws of the countries in which they operate,” Sizemore says. He adds that many investors who do the proper research (or get help from a savvy advisor) can learn right away whether the company has a rotten history with utilizing child labor, for example.

In the end, what one makes of sin stocks is either relative or strictly defined. “I have to laugh at the very idea of bringing ethics into the discussion,” says Jeff Reeves, executive editor at InvestorPlace.com. “If you’re looking for ethics on Wall Street, not only are you out of luck here, you’re out of luck everywhere. So you want to pass on the evils of alcohol but are willing to buy bank stocks that basically run up billions in fines as the cost of doing business?”

To which Hagenbuch counters: “If a friend who suffers from a gambling addiction asks you to lend him $100 so he can go to a casino, would you give him the money? Investors in gaming companies support this same self-destructive behavior.”

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