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Why I love cigarettes, even though I don’t smoke

Investing in companies that supply our bad habits has proven to be a winning theme

Have you ever thought about taking a punt on sin stocks? Perish the thought eh!

Not only are there ethical problems but also, surely, stocks like these are likely to be underperforming the market?

But what if they are doing the reverse? Take a look, for example, at tobacco shares. It is no exaggeration to say that investing in tobacco companies has been one of the most lucrative investments of recent times.

The FTSE All World Tobacco index rose 988 per cent from 2000 to last month. This compares with a rise of 131 per cent in the FTSE All World index for the same period.

This may be explained by the fact that contrary to some impressions, tobacco sales remain near their peak, mainly due to increased demand in developing countries.

If tobacco is not your thing what about another looking at Macau casino shares which peaked and crashed last year but are coming back strongly this year.

Brewery stocks are also out there on the sin list and represent quite a mystery, not least because in most developed countries beer sales have slumped while shares in breweries seem to be buoyant. So called craft beers have bucked the sales decline trend and help to explain the strength of these counters but the reality is that craft sales remain a niche within the portfolios of the big brewers.

Away from the heady world of gambling and booze but firmly among things that are bad for you would be fast food stocks. There are many listed companies in this sector and the share price picture is more mixed; however at the beginning of this year a survey of US brokers recommendations on US fast food stocks found that out of 46 companies in this sector 21 were rated as buys, while just two had a sell sticker.

Deeply unfashionable McDonalds is gaining shareholder interest again and while companies of this kind are talking a lot about their healthy options what really interests investors is their discounted offerings on many products that come under the category of well known, and um, well loved diet busters. It’s these good old greasy combos at low prices, not the so-called healthy options, which are adding impressively to the bottom line.

Stop reading right here if you have a moral objection to any of these sin stocks. Indeed a large number of institutional investors, not forgetting many individuals, have decided to avoid these counters like the plague. They have sound ethical reasons for reaching this decision, which often means that they are willingly forgoing potential profit.

That leaves the rest of us who are, to be blunt, less scrupulous. This gives rise to a reduced investor universe for some really big sin counters, which in turn means that opportunities abound.

What’s more all these sin stocks share some common big positives. For example: strong cash flow, then there’s very high profit margins (except for fast food which relies on volume), not forgetting rather remarkable brand loyalty that produces a solid customer base.

On the flip side of this coin is the knowledge that these stocks tend to be highly volatile; the gambling sector is particularly vulnerable. Then there are regulatory issues that have a strong impact on sales because there is nothing that politicians like doing more than tut-tutting over signs of sin.

So, in some ways, investing in sin is a risky old business but, as they say in the investment world, without risk there is little profit. Yet the risks here tend to be predictable.

Who does not know that tobacco consumption is injurious to health? Who can’t get their head around the idea that the world of gambling can be both risky and dangerous?

And so on. The fact is that precisely because these risks are very well known they are priced-in.

Heaven forbid that any of the above can be taken as a exhortation to dash out and buy sin stocks because not only is this column an advice-free zone, but more fundamentally, I can clearly understand why some people view this kind of investment as highly objectionable.

However this subject gives rise to hypocrisy which is also pretty unsavoury, as seen when the well-healed sneer at “common folk” for woofing down Big Macs, while saying nothing about the considerable health dangers of foie gras. It is hard to avoid the impression that snobbery is at play here. This also applies to things like betting where a visit to the horses is considered to be just fine and dandy while a night spent in a Macau casino is just too vulgar for words. Yet what’s the bottom line at both these places?

Sin will not disappear anytime soon nor are so called sin stocks going away, so…

Stephen Vines is a Hong Kong broadcaster, writer and entrepreneur

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