21 Jul Understanding the Value of Sin Stocks

What are sin stocks?

Sin stocks or vice stocks are basically stocks of companies that deal in alcohol, adult material, tobacco, etc. that are thought of as detrimental to society or simply harmful.

Valuing these stocks

However, in the stock market a business is always valued for its capability to bring in sustainable profits and not on their moral significance. So, does the market value sinful stocks any differently?

In one word – no. If we were to compare companies like Diageo and Caesar’s Entertainment to lifestyle companies like Unilever and Hershey, data shows that their stocks have appreciated in the same fashion in recent years. More often than not, companies associated with sin stocks will show similar price-to-earnings ratios and strong price-to-book figures as any other company.

The valuation of a company is always associated with revenue and growth. In fact, since people who have certain vices will continue them even in times of recession. This is why sin stocks are sometimes valued at a premium as compared to companies that are susceptible to market trends.

While individuals choose to avoid these stocks primarily for negative emotions or disgrace associated with sin stocks. But the market does see these stocks as promising and stable. In essence, these stocks are a wonderful investment vehicle if one does not have any personal qualms.

A different treatment

Along with individuals, some mutual funds which support social causes also abstain from investing in sinful stocks as they consider these companies a violation of their belief system. A study titled ‘The Price of Sin’ showed that traditional individuals and entities such as pension funds avoided sin stocks to toe the line when it comes to being a social role model.

Conclusion

Fundamentally, the market does not value tobacco and alcohol blue chip stocks any differently than other high-quality companies. Also, that sinful stocks are not much affected by recession. Over the long run, these stocks are a good addition to your portfolio.

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