In this article we’ll look at the Top 10 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.
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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.
5. Las Vegas Sands Corp. (NYSE:LVS)
Las Vegas Sands Corp. (NYSE:LVS) shares were found in the 13F portfolios of 47 hedge funds on September 30, which represents a five-year high despite the company’s throwaway 2020, which says a lot about how positively hedge funds view the casino operator’s post-Covid prospects. The hedge fund ownership trend line looks a lot like Las Vegas Sands’ revenue and EBITDA trend lines, which have steadily risen since 2017, topping out at $13.74 billion and $5.54 billion respectively in 2019.
LVS shares have gained 17% since the end of October thanks to positive developments on the coronavirus vaccine front, but remain down by over 20% this year. If there is as much pent-up demand for travel and leisure spending post-pandemic as many analysts believe, the current share price is likely to look like a huge bargain by next summer.
4. Philip Morris International Inc. (NYSE:PM)
Philip Morris International Inc. (NYSE:PM) is another quality dividend-paying tobacco stock like rival Altria Group, Inc. (NYSE:MO), which ranked seventh on this list. 50 hedge funds had the sin stock in their 13F portfolios on September 30, including First Eagle Investment Management. The fund said in its Q1 investor letter that Philip Morris’ strong balance sheet and pricing power will see it through not only the pandemic, but also the long-term transition from traditional cigarettes to newer alternatives like heated tobacco (IQOS), sales of which grew by 44% for Philip Morris last year.
3. Constellation Brands, Inc. (NYSE:STZ)
Hedge funds aren’t overly bullish on alcohol stocks, as Constellation Brands, Inc. (NYSE:STZ) is the only one to crack the top ten and even it is well off its all-time hedge fund ownership highs. 53 funds were long STZ shares on September 30, which was nonetheless good for third place on the list of top sin stocks to invest in.
Blue Hawk Investment Group discussed Constellation Brands in its Q1 investor letter, saying it bought more STZ shares as they crumbled in Q1, believing the market was misjudging the company’s exposure to closed bars and restaurants and asserting that the company is very well positioned over the short, medium, and long-term. STZ shares have fully rebounded from their Q1 swoon to post 13% gains year-to-date.
2. Raytheon Technologies Corporation (NYSE:RTX)
Unlike rival Lockheed Martin Corp (NYSE:LMT), Raytheon has much less exposure to military sales, which were about the company’s only bright spot during a dismal Q3 in which revenue from its Collins Aerospace and Pratt Whitney segments tumbled by 34%. Things were bleak enough that Raytheon was forced to slash 15,000 jobs earlier this year. 2021 will undoubtedly be a better year for the company however, with analysts projecting $5.5 billion in free cash flow.
1. Caesars Entertainment, Inc. (NASDAQ:CZR)
Caesars Entertainment, Inc. (NASDAQ:CZR) is far and away hedge funds’ favorite sin stock, being owned by 74 of them at the end of Q3, a 48% jump quarter-over-quarter. Hedge funds were clearly impressed by Caesars’ £2.9 billion acquisition of sports betting giant William Hill, which isn’t surprising given that many analysts felt they acquired the U.K-based bookmaker for a bargain price.
Union Gaming analyst John DeCree predicts that the pairing will be capable of generating revenue from its U.S. sports and iCasino businesses over the next two years that will be comparable to consensus estimates for DraftKings Inc. (NASDAQ:DKNG). Other analysts similarly believe that Caesars’ sports betting opportunity is being overly discounted by the market even as peers like DraftKings and Penn National Gaming, Inc (NASDAQ:PENN) have posted exorbitant gains this year.
If investing in socially responsible companies is more your thing, don’t miss our article breaking down the Top 10 ESG Stocks Al Gore’s $25 Billion Hedge Fund Is Buying.
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Disclosure: None. Top 10 Sin Stocks to Buy Now is originally published at Insider Monkey.
