The Profits of Sin

Alcohol, gambling and tobacco make good investments in uncertain times

Consumers may cut back on some luxuries during periods of economic stress, but they tend to indulge more in “stress-relieving” commodities—alcohol, tobacco and gambling. Whether these activities actually make anyone feel better is open to debate, but the companies that specialize in them are usually good bets for hard economic times.

Consumption of alcohol is up, specifically wine, and the one stock most touted by investors at the moment is Diageo plc (DEO). Diageo is the world’s largest beverage company, producer of the best-selling vodka (Smirnoff), Scotch (Johnnie Walker), tequila (José Cuervo), liqueur (Baileys) and stout (Guinness). The stock is projected to earn $5.09 per share in 2011, and is a good bet for continued growth.

Tobacco is a controversial investment, and everyone has to assess the morality of it for themselves. Despite the success of the anti-smoking campaign in the U.S. and Europe, tobacco use is booming in Asia and other developing regions. Both Lorillard and RJR pay significant dividends, and both companies have raised prices to cover their share of the tobacco settlement. Of course, tobacco is classically a cash cow for many municipalities—New York State recently raised taxes on cigarettes by $1.60 per pack, and a pack of Marlboros now sells for $14.50 in Manhattan (talk about “no new taxes”).

The gambling sector experienced explosive growth in the U.S. for many years, and on the surface this would seem to be a thing of the past. Even as Las Vegas has been hit with declining tourism, however, gambling in Macau is booming. Wynn Resorts WYNN) holds one of only six Chinese casino licenses, making it an attractive investment in the eyes of many experts.

The best thing about the so-called “sin stocks?” You can hold on to them as the economy improves, since they only seem to go up as the world prospers.

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