In this article we’ll look at the Top 10 Sin Stocks to Buy Now. If you want to jump ahead to the most promising sinful stocks out there, check out the Top 5 Sin Stocks to Buy Now.
Sin stocks represent a wide-ranging basket of companies whose operations are broadly considered to be somewhere on the spectrum between morally dubious at best to downright unethical at worst. A common thread that binds these companies is that they often exploit human weakness and vulnerabilities in the form of harmful addictive activities like cigarette smoking and gambling.
However, definitions like that could easily be applied to other companies that often avoid being labelled as sin stocks, such as food companies which make their sugar and chemical-laden products as addictive as possible, contributing to the obesity epidemic, or to social media companies, which exploit the same kind of psychological triggers that make gambling so addictive to keep users glued to their platforms in the pursuit of more likes and to the detriment of their mental health.
Nowhere is the hyperbolic battle between sin and supposed virtuousness in stock form more jarring than with marijuana stocks (check out the Top 10 Cannabis Stocks To Buy Now), which are considered sin stocks by some, yet have also been included in many ESG-themed ETFs as supposed socially responsible investments, presumably because of marijuana’s moderate medicinal benefits.
Needless to say, any highfalutin castigation (and we don’t use those words lightly, or spell them easily) of so-called sin stocks should be taken with a grain of salt, as should any fears that anyone who invests in said stocks is an immoral wretch who’s contributing to the downfall of society.
That said, for the purposes of this article we do have to define which industries will be considered sin stocks, though that shouldn’t be taken as judgement one way or the other about these industries and certainly not of anyone who invests in them.
Sin stocks after all generally have a lot of positives on their side, including being recession-proof, generating strong and consistent earnings, and having limited competition. It’s not surprising then that UBS research found that the 50 largest sin stocks greatly outperformed the MSCI World Index (minus those 50 stocks) over the last 43 years, by about 5% annually, although there’s been a slide in performance over the past three years.
For this list we’ll stick to companies in the alcohol, tobacco, gambling, and weapons development spaces, which are the four industries included on virtually every list of sin stocks. When it comes to weapons development, we only considered companies that actually produce weapons while excluding companies that supply parts to weapons manufacturers.
To compile the list of top ten sin stocks from those industries, we turned to hedge fund ownership of the companies in those industries, which our research has shown to be a powerful predictor of future stock market performance.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. That doesn’t mean there isn’t money to be made off their consensus stock picks. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Now then, let’s check out the Top 10 Sin Stocks to Buy Now. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy.
10. DraftKings Inc. (NASDAQ:DKNG)
First up is DraftKings Inc. (NASDAQ:DKNG), the fantasy sports and betting operator which went public last year. Hedge fund ownership of DKNG jumped from just 8 at the end of Q3 of 2019 to 22 by the end of 2019 and from there to 52 by the middle of 2020. Several hedge funds did sell off DKNG during Q3, which was likely a case of profit taking or the valuation becoming too rich after shares gained 451% through the first nine months of this year.
In its Q2 investor letter, McLain Capital warned investors to be cautious of the rapidly appreciating stock, which was ‘only’ up about 200% year-to-date at that point, saying that the stock was already trading at 16x 2022 revenue estimates and that it was expected to still have large negative EBITDA margins even through the end of that year.
9. The Boeing Company (NYSE:BA)
BA ranks 9th in our list of the top 10 sin stocks to buy now. The Boeing Company (NYSE:BA) was owned by just 43 hedge funds at the end of September, a far cry from the more than 80 funds that were long BA at the start of the year. Unsurprisingly, the bulk of those sellers ditched the stock during Q1, when the pandemic and its implications for Boeing and other aerospace companies became apparent on top of Boeing’s 737 Max woes.
Several hedge funds see a golden opportunity in BA shares however, including Bill Miller’s Miller Value Partners, which said in its Q1 investor letter that Boeing was still generating a 10-15% FCF yield despite the greatly reduced forecasts and that Boeing shares could double once the economy returns to normal.
8. Penn National Gaming, Inc (NASDAQ:PENN)
PENN ranks 8th in our list of the top 10 sin stocks to buy now. In stark contrast to Boeing, Penn National Gaming, Inc (NASDAQ:PENN) has enjoyed a 150% surge in hedge fund ownership since the end of March on the strength of the company’s opportunity in the online sports betting space. PENN shares have skyrocketed by 657% since the end of Q1.
In its Q3 investor letter, Baron Discovery Fund was impressed by Penn National’s strong Q3 results and the robust activity on its Barstool sports betting app since its launch in September. The fund is bullish on Penn National’s improved balance sheet, believing it will allow the company to more aggressively grow its online platform and also praised the company’s targeted marketing efforts for bringing in the most profitable customers (or whales in gaming speak).
7. Altria Group, Inc. (NYSE:MO)
MO ranks 7th in our list of the top 10 sin stocks to buy now. If you like dividend payments to accompany your sinful investments, then Altria Group, Inc. (NYSE:MO) may be the stock for you. One of the 10 Best High Dividend Stocks To Buy Now, Altria’s dividend currently yields just over 8% and is about as safe as they come. The tobacco manufacturer has raised its dividend payments 55 times over the past 51 years, including earlier this year.
That dividend is just one of the reasons why 47 hedge funds were long MO on September 30 despite the company’s low growth profile. There is even some potential on that front, as MO shareholder Charioteer Investing pointed out in its analysis of Altria’s Q2 results, noting that IQOS and ON! could drive substantive organic growth for Altria over the medium term.
6. Lockheed Martin Corp (NYSE:LMT)
If you like dividend payments AND earnings growth alongside your sin stocks, then Lockheed Martin Corp (NYSE:LMT) may be the stock for you, being one of the Top 10 Earnings Growth Stocks with Dividends for 2021. LMT shares currently yield 2.99% annually after the dividend was raised by 8% earlier this year.
While the pandemic has understandably impacted Lockheed Martin’s near-term earnings, the company is coming off a stellar 2019 in which it earned a record $22.09 per share. It also hasn’t suffered a massive hedge fund sell off like Boeing given that the bulk of its revenue is derived from U.S government contracts rather than other pandemic-battered companies. LMT has a greater than $140 billion backlog and is projected to be delivering as many as 180 aircraft annually by 2025.
Click to continue reading and see the Top 5 Sin Stocks to Buy Now.
Disclosure: None. Top 10 Sin Stocks to Buy Now is originally published at Insider Monkey.