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this is episode 666 so whether it's appropriate or not we're going to cover sin stocks so first off we're going to outline what our send stocks we're going to dive into nine stocks to invest for the long term and define what the stock segments are so tobacco alcohol cannabis and so on we're gonna ask the question are they worth it for the average investor and look at some expected returns some historical returns and then recap the benefits of send socks with four reasons that investing instant stocks are useful for your overall market strategy and then look at the risks also look at four things that you should consider prior to investing in sin stocks all coming up on episode 666 it's only entertainment welcome back to the talking hedge i'm josh kinkade capital markets analyst and host of your cannabis business podcast today we're looking at sin stocks so as i mentioned we're going to outline that first talking about how sin stocks referring to shares of public companies engaging in a business or industry that's considered unethical immoral unsavory traditionally the term's been applied to weapons alcohol gambling tobacco and finally cannabis when these come into play we'll talk about that generally during economic downturn is when they come into play and we'll talk about why spoiler dirt is because they're shunned but essentially since stocks are considered to be relatively recession proof so that is companies are thought to be insulated from economic slowdowns because most people don't view their sins as discretionary in a lot of cases their addictions so in reality sin stocks can enjoy temporary insulation from economic conditions but they generally suffer when economic conditions impair consumers ability to spend in other words if they don't have money they can't spend it although what we saw with cannabis being deemed essential and essentially everyone being laid off and the economy shut down we're still seeing cannabis at all-time highs so maybe there's some priority shifts not really sure but with the help of government money we're still seeing this but once that gets cut off uh what this is saying is essentially a lot of these vice stocks suffer because people have to cut back on them over the long term sand stocks are going to perform well because consumers return quickly to their vices when the economy improves and spend aggressively during those times so no accident that vice stocks do well in economic climates people party smoke and gamble in good times and bad they just do it for different reasons so traders can take advantage of this and invest in weapons manufacturers or alcohol you know spirits distributors or tobacco gambling and now cannabis companies all to try to protect their portfolios during economic downturns we're starting to see some cracks all-time highs and signs that there may be an end to this historic um longest bull run in history it's got to come to an end at some point right so how do you protect that well let's look at send stocks sin stocks although generally shun they do have a lot of positives including being recession proof generating strong consistent earnings uh generally speaking and having limited competition so not surprising there's a ubs research that found 50 largest sin stocks greatly outperformed the msci world index so over the last 43 years outperforming that global index by 5 annually so there's also been a slide in performance over the last couple of years and that's probably crypto or you know other alternatives people are looking at alt finance or alternative investments so companies are generally paying uh really good dividends so altria that's the manufacture of marlboro so they gave their investors 20 annual returns on average since 1968 so that's a pretty amazing record for dividends so all while growing dividend payments you have spirits so uh diago they've been giving 10 annual returns over the last 10 years and paid out nearly 40 percent of the purchase price in cash dividends alone so despite that there's a lot of investors that have excluded send stocks because they don't want to invest in it they don't want to be associated with it or they have a sin clause that doesn't allow them to participate in that so some other explanations for the abnormal returns in syn stocks is that they have systematically under-priced because so many investors shun them so this is kind of one theory that we're going to take a look at um as people don't invest in that and and look away from send stocks that's all obviously enabling investors who are willing to invest in send stocks uh going against social norms and uh and conformities they're earning a reputation risk premium in other words uh explaining sin stock industries could benefit from monopolistic returns or that stocks face increased litigation risk for investors that are rewarded if or when that doesn't happen so let's take a look at the nine cent stocks to invest for the long run first up is advisor shares so that's a general vice etf doing the worst out of all of them because they do incorporate other things outside of cannabis and not doing as well as they maybe should consolation brands is maybe another one you want to take a look at they have alcohol beverage marketing companies with over 40 facilities and 9 000 workers they've invested four and a half billion up in canada for uh infused cannabis beverages alone so they could be a global leader in that diago as we mentioned ticker symbol deo one of the world's largest alcohol distillers popular brands are smearing off johnny walkers guinness and they pay a massive dividend like we mentioned ten percent per year so etf mg alternative harvest index ticker symbol mj one of the competitors that we have to our uh ai based automated algorithmic trading mj's doing really well this year last year they were down like 56 percent for the year this year they're up like 89 or something 98 something like that uh ishares they're an aerospace and defense company some people include defense and some don't when looking at sin stocks so it is looked at differently but essentially if you are going to try and get a broad base and not go after boeing lockheed martin and individual equities you can just go after an etf like ita is a ticker symbol for i shares us aerospace and defense etf or you can go for an individual equity like smith and wesson ticker symbol s wbi ammo is sold out good luck finding that i don't know if that's because of you know the potential zombie apocalypse that people are looking at or homeland security literally buying um millions and trillions of rounds for whatever reason their own zombie apocalypse there's a gaming etf the van ack sectors it's ticker symbol bjk gaming is interesting we'll kind of talk about that a little bit but um not doing so hot if you've been to vegas and if you haven't then maybe you know why so um maybe look at something a little more stable like the vanguard consumer staple index fund ticker symbol vdc that's going to look at consumer staples the things that are necessary so kind of the opposite of a vice um maybe hedging that in itself so altria group we mentioned massive dividends u.s tobacco though not a fan um obviously but um i do day trade that uh through our our algorithm so um yeah we're trying to make some money not trying to to support this company with long-term investments just day trading so marlboro a popular brand and consistently offer dividends i think we mentioned 40 which is kind of crazy so let's take a look at um individual sectors so we looked at some companies we're going to take a look at uh individual sectors and starting with firearms because it's pretty hot right now sales are on the rise there's massive demand and as of date the firearm industry is subject to change with the regulations i think nra filed bankruptcy to protect themselves from biden who announced that he wants to shut them down so you've got smith and wesson they're the leading handgun provider in the u.s you have sturm and rutger ruger sorry ruger that ticker symbol rgr they're a semi-automatic weapons and pistol company there's only two ammo manufacturers in the u.s it's olin oln and alliant technologies atk so olin manufactures and sells ammunition and powder while alliant technologies they sell powder ammunition and reloading equipment moving on to gambling so apart from economic conditions and casino stocks had a difficult run obviously with the shutdown and everything so a lot of states have now uh legalized some form of gambling and so that kind of puts out las vegas and atlantic city that have put in a ton of money so on top of that you've got several international casino hot spots like macau uh hong kong so nevertheless the casino giants uh do well sometimes uh we'll kind of get into that towards the end when we recap um they don't do as well as the rest so take that um to note and if you do want to move forward take a look at las vegas sands um mgm grand the win boyd gaming pin national gaming and isle of capri casinos tobacco you know not a fan obviously being in in cannabis they've kind of put the industry down for a long time so there's a declining sales they're all moving towards vape um and that's an opportunity to kind of rake in some cash there so companies have consolidated concentrating efforts on developing overseas markets so there's reynolds american r a i best known for uh um camel and cool and paul mall philip morris pm known for marlboro and then british tobacco company bti has lucky strike imperial tobacco largest seller of cigars and fine cut tobaccos maybe they'll get into blunts who knows but altria mo they have a u.s smokeless tobacco company as well we we do day trade mo so ironically the stocks of tobacco companies have at times performed better than the pharmaceutical companies making cancer drugs to combat smoking-related illnesses we're not covering pharma alcohol publicly traded brewers and retailers of beer wine liquor makeup another classic sin stock category so the spirits and alcohol distillers industry they've gone through a consolidation period most notably inbev they acquired anheuser-busch but you have boston beer you have molson coors there's fortune brands known for jim bean and then brown foreman of finlandia and jack daniels diago we mentioned they have brands like johnny walker so some sin stocks that people don't actually talk about is lust so we obviously know that sex sells but it's kind of a tough market to cover there was the a military vet uh lgbtq member and um inventor of the dick pipe i came across him at canacon and he had a really hard time pun intended to get this dick pipe into the market um and you're still struggling it's that's the really importance of a strategic partnership but um even though there is a market it's kind of hard to get in there so there's a low barrier to entry for pornography and burlesque which can make margins difficult but that doesn't mean that there aren't giants in the industry like hugh hefner so you pla is a ticker symbol for that spain-based private media group or rick's cabaret international and new frontier media which is a pornographic pornographer film producer that's what you want to invest in again tobacco so they've been a target for decades for health campaigns against anti-smoking frequent subject to sin taxes but a considerable portion of the american public continues to puff away and in asia specifically i think europe is still heavily smokers but um cannabis i think is going to be kind of the new thing that they all invest in so short term for cannabis it's still kind of being written out but long-term outlook for the sector remains incredibly strong we saw that uh right after the elections when everything popped massive cash inflows into the cannabis industry when they saw that the house and senate and president went democratic and so we're all kind of looking at federal legalization at some point if mexico and israel legalize then it's going to put even more pressure on the u.s we did mention philip morris there's anheuser-busch and diago there's altria constellation brands we mentioned huge investment in beverages in canada las vegas sands red rock resorts boyd gaming there's also miscellaneous sins categories that we already talked about are traditional but trying to create additional groups around the classics so under sloth if you look at sloth as a sin lazy whatever you could look at video game stocks like electronic arts or take two interactive if you're looking at world wrestling entertainment wwe um you could look at that as the anger sin gluttony you can look at mcdonald's krispy kreme um but the the ir ironic part about all of it is that regulations so regulations actually help those that are already in the business or incumbent companies so for example you got states that issue a limited number of gambling licenses that keeps rivals out tiered alcohol distribution system that keeps a lot of limited competition you have reduced competition that can make industries more profitable um same thing is going to happen with cannabis right so we had 1400 growers in washington state that's now down to about 450 but how many tomato farmers do you know and that are 450 in another state oregon has way too much there's 7 500 licenses in oklahoma good luck with that that's a nightmare waiting to happen a lot of consolidation there so having said all of that um sin stocks could be frowned upon continuously for whatever reason as this kind of evolves and looks at some inefficiencies but also providing investment opportunities you could go east on the east coast and look at emerging markets you can go west and look at distressed assets some of these companies are ripe for consolidation in oregon and eventually uh you know in i almost said kentucky maybe i was a freudian slip but in oklahoma i mentioned kentucky because they have the the least funded pension plan so they'll be legalizing eventually that's that's my bet for this year's they've got to start talking about that right away so if you are going to look at it um at cannabis and send stocks you have to ask the question is it worth it for the average investor so creating part of your portfolio and synthox that can be a profitable investment strategy you have to do it the right way though so be aware that sand stocks generally attract a lower number of investors so a lot of people have reservations about investing in cannabis being unethical or otherwise doesn't mean that the company can't perform well and provide a reasonable rate of return but you should consider the higher risk and liquidity issues so penny stocks are a great example i don't touch penny stocks people ask me all the time about my opinion and my opinion is if it's point zero zero something it's worthless go ahead and gamble like i don't care about i'm not going to blow on your dice at the casino right i'm not going to tell you what my opinion is on something that's literally worth this if that's your thing go for it but the volume is really important without volume you're not going to have uh the transaction activity necessary to keep that stock price going for the foreseeable future so as a pragmatic investor we always advise that you should be open to the possibility of investing in sin stocks especially if you want to make a good profit from it you have to do your due diligence and stop looking at penny stocks so um before we we burn this one down we're going to give a little summary i want to talk about what the expected returns are so the historical returns are important to kind of look at to see do these in fact give a better return overall during an economic downturn so there's an economic theory suggesting that share prices of sin businesses become depressed if a large enough portion of investors choose to avoid them becoming the shunned stock hypothesis so as as institutional investors don't invest in it there's a discount like by 20 or whatever because they're not buying it so higher returns to buy stocks occurred because they're more profitable and less wasteful with investment than the average corporation uh send stock alpha remains highly significant after controlling for the size value and momentum factors and that means that uh send stoc s move higher and faster than the overall base market and especially for ipos they're even more underpriced than non-send stock firms by about 23 so the shun stock hypothesis has the flip side benefit to it there's a lot of social responsibility investing or environmental social governance or esg investing that's gaining popularity but what you're seeing is opportunity cost as well so there's sin stocks that have a higher cost of capital because they trade at a lower price to earnings providing investors with a higher expected return so some of those investors are looking at higher expectations and compensation for the emotional cost of the exposure to offensive companies those immoral sinful companies but is the theory supported by historical evidence so let's take a look to see if that in fact is true that sin stocks do have historical advantages during economic downturns looking at some of that those examples there was a study that came out showing a period between 1965 through 2006 with the u.s portfolio of sin stocks returning 3.48 percent per year uh stocks in seven large european markets and canada also outperformed syn socks by about two and a half percent per year and so the authors of that study concluded that the abnormal risk adjusted returns of vice stocks or syn stocks are due to negligence by institutional investors who lean towards the side of social responsibility investing so a lot of this capital comes not from mom and pops or retail investors it comes from the institutional investors the brick and mortars and when they don't look at it during normal bull markets then they're missing out they're looking at value and opportunities during economic downturns and that's when they you know basically shut the door to social responsibility investing and go after whatever makes sense and whatever they can make money off of so further evidence is showing that avoiding sin socks comes at a price there's another report that came out showing um that 115 year old period from 1900 through 2014 tobacco firms beat the overall equity market by an annualized four and a half percent in the us and 2.6 percent in the uk more evidence 2017 there is a fewer reasons to send five factor investigation of vice stocks which covered the period from october of 96 to october of 2016 and showed that while the s p 500 index returned 7.8 percent per year the vice fund returned 11 and a half percent and the author of that study concluded that the higher returns to vice stocks occurred because they're more profitable and less wasteful with investment than the average corporation not so much with cannabis we're seeing you know a billion dollars on aurora 3 billion on canopy just being thrown out so not so much they're still trying to figure some things out but maybe with old school alcohol old school tobacco they're definitely not wasteful with their money so ipos so we mentioned that sin stock ipos are more underpriced by 22.3 percent than non-ipo or non-sin stock ipos but in particular gaming stocks experience large under pricing so they don't do that well right now and haven't for the last few years however if there are any ipos in gaming there's an opportunity to trade on that uh not necessarily long term so authors of of that study said sin stocks tend to be more underpriced so as societal norms in the legal environment continue to evolve in north america and abroad investment managers need to understand how these assets behave in order to assess the benefits of the reputational risk premium versus the potential non-cash costs like negative publicity all because of investing in non-traditional asset classes like syn stocks so what are the benefits let's dive into some of the benefits there's four reasons uh for investment in socks and how it can be useful to your overall market strategy number one uh there's better value so if you go through and research syntax you're gonna find that a lot of businesses are financially stable but their prices don't really reflect that and so there's some value in there so investors who specifically ignore and avoid investments in sin they're called environmental social governance esg that we covered and since stocks are generally shunned by these institutional investors so lower demand keeps the price down regardless of how well the company is performing and that undervaluation of sin stocks represents an opportunity for pragmatic investors who can get a good deal and create a good portfolio number two is that there's better predictability the demand pattern for vice companies are more predictable than regular businesses so the demand is inelastic it doesn't move you know maybe you have other priorities but typically vices people stick to so stocks present a relatively safer investment option because there's less uncertainty with those businesses and demand is stable defensive investments so firearms closely linked to the u.s government defense expenditure so over the last 30 years the defense budget has either increased or or stayed the same so a lot of the defense spending is invested in long-term projects that can generate positive cash flow uh if you're into supporting the military industrial complex number four is huge investments so let's uh investment analysts they're performing studies on syn stocks to look at their historical performance and the explanation was that since stocks actually do pay returns higher than other companies however since stocks are under price and their rate of return on the actual investment goes up and makes them seem more lucrative than regular shares another explanation was that sin industries benefit from monopolistic returns as a lot of entrepreneurs are unwilling to enter those industries and this leaves the door open for existing businesses to create long you know strong brands and improve their profits what are the risks though obviously there's some risk investing in sin stocks let's kind of dive in and see what the sin stock risks are obviously every investment has some risks and stocks are no different so interesting the risk for some businesses don't come from consumers but government regulators and the legislative bodies so businesses operating in the sins sectors that are legal there are questions associated with their ethical nature you have societal pressures and demands for groups to um you know shut them down constantly uh like the alcohol industry went through a prohibition period now it's not cannabis same thing about to flip over so you want to take a look at regulatory risk all the time we always say that you should do your due diligence so take some reasonable steps to look at send stocks without taking on too much risk so there are some things that you want to consider number one do not invest in send stocks only operating in one area so um you know that's why you want to diversify your portfolio that's why you want to look at etfs that's the whole point of that so diversify you want to keep an eye on consumer trends that's why we report on that so often on how postcovid is changing consumer preferences and demand in the way that they buy what they're buying from delivery to bulk purchases and etc so it's important to kind of know what's going on and some of the shifting in gears like from smoking to vaping for example so if you're seriously wanting to invest in send stocks you should keep an eye out for consumer trends in that industry stay up to date about it so you can kind of avoid some potential uh regulations as well and then adjust your strategy accordingly to make those trends uh around government policies also you want to consider the market pragmatically take account for how other investors are thinking but don't get caught up in what others are saying about it so that's the whole problem with youtube is it's not even legal to give financial advice so all these guys are not financial advisors including myself i used to be but i'm not this is not advice so to make a profit and send stocks you should be rational and look at the business in terms of performance and profit and not just speculation you've got a lot of people are just buying the dips they have no idea what they're doing there's no fundamentals fundamentals have been dead if you're not a technical trader you're a gambler so look at the liquidity risk you have to have an exit strategy so being able to buy and sell something is fine but when everyone's trying to get out at the same time you got to make sure that you know your training stop loss is set or whatever that you're paying attention so for that reasons you want to look at volume and liquidity make sure you can get out so bottom line stocks they're offering a unique set of opportunities and risk but generally they're undervalued in the market because a select group of investors avoids buying them makes an average return on these shares very lucrative for investors however send stocks are riskier because their products are considered a cause of social advice and problems so the business has to ensure its operations are licensed and don't fall out the wrong side of the law make sure that they're compliant dpc eligible if it's five digits ending in f you want to do even more research on that uh yeah come back to the talking edge to find out more with that we're gonna roll this one up i'm josh kincade this is the talking hedge i appreciate you guys watching this episode 666. don't forget to like share and subscribe or don't and i'm out don't forget to smash that like button on your way out and check 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