Screening For Sin

By Glenn Curtis | January 10, 2009 AAA

Over time, certain so-called "sin stocks" have been touted as a safe haven during economic slowdown.

The reason some investors may favor these stocks in periods of economic sluggishness is quite simple: in both good times and in bad, sin stock staple items, such as tobacco, alcohol and weapons, maintain a relatively steady level of demand. In fact, some think that slow economic times may actually lead to increased consumption of things like alcohol and/or tobacco. (To learn more about this concept, be sure to read A Prelude to Sinful Investing and The Evolution Of Sinful Investing.)

Let's screen a few of these companies to see which might have solid upside potential.

Screening for Sin
Below is a list of so-called sin stocks that are expected to show positive earnings growth in the coming year. These may warrant a closer look.

Company Market Cap Current Year Estimate Next Year Estimate
Boeing
(NYSE:BA)
$31.9 Billion $4.59 $5.83
British American Tobacco
(Amex:BTI)
$54.6 Billion $4.00 $4.39
Lockheed Martin
(NYSE:LMT)
$32.1 Billion $7.72

$7.84

Raytheon
(NYSE:RTN)
$20.7 Billion $4.04

$4.59

Reynolds American
(NYSE:RAI)
$11.6 Billion $4.69 $4.73
Data as of January 12, 2009, intraday

The Big, Bad Boeing
The major airlines have had a tough go this past year. Rising fuel prices and the sluggish economy are largely to blame. Perhaps not surprisingly, Boeing, which makes commercial aircraft, has seen its share price sink by more than 40% over the last 52 weeks. (For more on airline stocks, see Is That Airline Ready For Liftoff?)

However, I believe that the shares will bounce back. After all, Boeing's foothold in the commercial aircraft business is strong and the company has also been heavily involved in weapons manufacturing. Its popular weapons systems include the B-1B aircraft and the F-22 Raptor.

Long story short, because the U.S. continues to emphasize the importance of homeland defense, it appears that America's need for weapons isn't going away entirely anytime soon. As a result, I think the company will continue to reap the benefits.

Digging a bit deeper I think it's important to realize that the company has generated some pretty decent numbers, despite the economic climate. In its Q3, the company generated 96 cents. This number was disappointing in that it was below the $1.44 a share it generated in the comparable period the year before - but it's still impressive, all things considered. And for the first nine months of its year, Boeing generated $3.76 (versus $3.92 a share in the comparable period the year earlier).

Also, according to data on Yahoo Finance, the company is expected to earn $4.59 a share in the current year and $5.83 a share next year. Given that the shares trade at $43 and change, that's hard to ignore. Running the numbers, the company currently trades at about 9.5 times the current year estimate and at about 7.5 times next year's estimate. I think that's pretty cheap. (Learn to set your own expectations in Do-It-Yourself Analyst Predictions.)

There are a couple of other tidbits about Boeing that bear mentioning:

-Boeing's director, John Biggs, bought 10,000 shares toward the latter part of last summer at $62.06. I think one could argue that he wouldn't have dropped that kind of money to buy the stock unless he thought he had a decent shot of making some dough down the road.

-Boeing's backlog is also intriguing. In its last reported quarterly earnings, Boeing reported that its backlog totaled $349.4 billion. That was up a bit from the $346.1 billion in the June quarter. This suggests that Boeing's future may not be as bleak as some might think.

Bottom Line
The short list of sin stocks above are also expected to show earnings per share growth in the next year (from the current year). They may warrant closer inspection. Sin stock companies tend to offer stable returns, even in hard times. As such, sinful sectors might be a good place to park a portion of your portfolio in both good times and bad.

Read the arguments for and against a sinful investing strategy in Socially Responsible Investing Vs. Sin Stocks.

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