Published: April 29, 2009

One of the most controversial topics many fund managers face is the decision to invest in "sin stocks." Some investors even refuse to hold shares of companies operating on the other side of their moral spectrum...

That's why tobacco, alcohol, and gambling- along with pornography, strip clubs, and guns - are all considered to be "sin stocks."

Historically, socially responsible investors (or SRIs, as they're sometimes called) forgo potential profits from companies like cigarette manufacturers and alcoholic beverage producers, no matter how lucrative they are.

This movement is coming into light more often as more investors view traditional market powerhouses like Big Oil's Exxon Mobil and Chevron as sin stocks. Even coal miners and stem cell researchers are beginning to feel the wrath...

However, just because some investors are steering clear does not mean these companies are just going to go away. Historically, sin stocks thrive in generally poor economic
conditions...

You see, most people think of vices like drinking, smoking and gambling as discretionary activities. Drinkers, smokers and gamblers don't. As we've seen over the past few months, companies that aren't selling essential products or services are falling out of favor. Take Panasonic, for example. The company's largest source of revenue comes from TV and other electronic sales.

Since no one is buying these products during our current recession, the company posted its worst third quarter in years. Investors fled, sending shares down more than 60% from their 2007 highs.

But drinkers, smokers and gamblers - the ones actually spending the money on these vices - don't view these habits the same as someone would a TV. In fact, it's not even hard to imagine recessions like ours causing more drinking, smoking and gambling.

The fact remains that most recessions are great for investing in alcohol, tobacco and gambling. Taking a quick look at our last downturn (2000-2002), it's clear how lucrative these stocks can be.

From its high in March 2000, the S&P 500 fell as much as 49%. During that period, Philip Morris - the largest tobacco producer in the Western Hemisphere - jumped as high as 200%. Shares of MGM - one of the world's largest casino owners - were good for a quick double. And Molson - a leading beer producer - watched its shares rise as much as 75%.

So if sin stocks sell in recessionary periods, why are they all near or at their 52-week lows? The answer is this isn't your typical recession...

Most recessions come with slightly higher unemployment numbers, tighter pocketbooks and temporary downturns in the market. This one is packed with fears of a second Great Depression that has even crushed shares of Altria (formerly Philip Morris) and Molson Coors. Fortunately for us, this is a huge opportunity...

I'd be willing to bet that you know a few people who have cut their losses in the market and are waiting for better days. You might even be one of them. There are millions of others out there struggling to make ends meet. The probability of either of these groups putting their money in the stock market is small. But that's what they should do.

When the market goes sideways, especially with severe spikes and dips along the way, investors find recessionary plays. Much of our portfolio will take advantage of this, but so will these sin stocks. In fact, these are the ones with the best chance to break out of the trading range to the north, while everything else just falls flat.

Sincerely,

--Jim Nelson
Editor
Penny Sleuth

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