Unless a lump of coal is your idea of a good Christmas gift, it pays to be nice rather than naughty around this time of year. You'll just have to hope that Santa isn't checking your stock portfolio, however, as the "naughty stocks" are doing quite well lately.

The term "sin stock" is used loosely, but it usually refers to companies that engage in the sale of weapons, alcohol, gambling, tobacco, or pornography. Over time many investors have taken a liking to sin stocks because these stocks are seen as sheltered from the business cycle and the whims of the market. Basically, in good times or bad, people will still, smoke, drink, gamble, shoot each other, or, well, you know...

With that in mind, below is a list of five sin stocks worthy of follow-up research.

Company Market Capitalization
Constellation Brands
(NYSE:STZ)
$3.1 B
Diageo
(NYSE:DEO)
$35.4 B
General Dynamics
(NYSE:GD)
$21.1 B
Northrop Grumman
(NYSE:NOC)
$13.5 B
WMS Industries
(NYSE:WMS)
$1.3 B
Data from market close December 8, 2008

Will GD Keep Moving with the Market?
Even when the United States is not engaged in a major conflict, it still needs weapons that act as a deterrent. Enter General Dynamics. The company supplies things like tanks, fighting vehicles and ammo. If you want something dead, General Dynamics' only question is "how dead do you want it?" To balance out the business, it also makes business jets with its Gulfstream Aerospace segment.

To be clear, the stock hasn't been immune to the market meltdown. The stock is down more than 42% over the last 52 weeks, while the S&P 500 was down just under 40%.

Generally Positive
However, there are some things that I see as positives. For starters, this company just keeps landing deals. It was recently awarded a $52 million engineering and support contract from the Navy. A subsidiary of the company was also recently awarded a $45.8 million contract option to provide work on a destroyer.

General Dynamics is also coming off a decent third quarter. It earned $1.59 a share, topping analyst expectations of $1.51 per share. It also raised 2008 guidance to $6.10 per share, up from its previous prediction of $6.00-6.05 per share in July. (To learn more, read Can Earnings Guidance Accurately Predict The Future.)

The analyst estimate is now at $6.18 per share, according to Yahoo Finance. I don't know if that number is doable, but for a stock that trades under $55 it does catch my eye, because that means it trades at only about 8.8 times the current year estimate.

Insider activity is also important when analyzing a stock, and there was an interesting buy recently by an officer. According to Yahoo Finance Jay Johnson purchased 14,000 shares at $53.76 a share in November. That seems like a pretty big vote of confidence to me. (To see how keeping tabs on company executives can provide clues about where a stock is headed, read Delving Into Insider Investments.)

In short, I think General Dynamics may be worth some closer examination given the fundamental factors mentioned above and the fact that it currently trades toward the low end of its 52-week trading range.

Bottom Line
Sin stocks are no guarantee of safety in a down market, but they can provide extra insulation during a down market. The key is to do your homework, and look for stocks that are truly immune to the ups and downs of the market.

Should ethics play a role in portfolio building? To learn more, read Socially Responsible Investing Vs. Sin Stocks.

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