For investors, the world of "sin" stocks has long been a place to find stable returns. Product categories like alcohol, tobacco and gambling have a recession-proof nature that often makes them portfolio staples. Most investors are OK with holding positions in these vices despite their "sin" connotations. The fourth category of sin stocks - weapons manufacturers - is a different matter.

Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.

With issues such as gun control, budget battles and military conflict filling the headlines, many investors simply don't feel comfortable owning the various defense contractors and weapons producers. In fact, two of the nation's largest pension funds - California's CalPERs and CalSTRs funds - are planning to review any investments in firearm manufacturers in light of December's Newton, Connecticut tragedy.

Given the defense firms' long-term outperformance, however, one has to wonder if these investors are cheating themselves out of potential returns. Looking past the potential moral implications, the sector does offer plenty of value for long-term investors.

So the question remains: Should you invest in weapons stocks? We'll take a look at the answer.

The Upside
For investors willing to look past the potential moral hazards of owning defense and weapons stocks, the long-term gains are there. Since its inception in 1991, the Dow Jones Aerospace & Defense index - which tracks companies such as Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) - has produced a 12.71% annual return. At the same time, the long-term prognosis for the defense and weapons firms remains pretty good. While the recent budget battles could mean a Department of Defense that is 5 to 10% smaller than current levels, many analysts expect sales of military hardware to be robust as the U.S. begins to look toward Asian countries as buyers.

Many defense firms are also branching out and gaining international contracts. Those contracts are one reason the Aerospace Industries Association projects that U.S. aerospace sales will increase 2.8% in 2013 to reach $226 billion in revenue. Threats such as Iran, as well as China's growing military presence, are leading to spending by smaller nations as they look to beef up their own weapons systems.

Looking out even longer term, concepts such as cyber security and unmanned drones are the future and will drive revenues for weapons producers such as AeroVironment (Nasdaq:AVAV).

So, as a portfolio component, the defense contractors and weapons producers certainly make sense to own.

Potential Internal Conflicts
The obvious conflict investors face in deciding whether to add weapons firms to a portfolio comes down to a simple question: Are you comfortable owning a company that makes a product designed to take someone's life?

For some investors, that's not an easy decision to make.

The recent school shooting in Newton, Connecticut has opened up a new dialogue on gun control and violence. Some investors' morals may conflict with profit motives. This makes owning weapons producers pretty prohibitive, and recent moves by some big pension funds are showing that social commentary outweighs those profits.

That shift in thinking by some of the world's largest investors may begin to shift public perceptions as well. Banning assault rifles or other automatic weapons could hinder stocks such as Smith & Wesson (Nasdaq:SWHC).

Overall, individuals need to think hard about their own portfolios and motives before adding this sin stock sector.

The Bottom Line
While most investors are OK with adding booze, gambling and tobacco to their portfolios, defense and weapons producers are another matter. Social and moral obligations need to be weighed before jumping in. For those that do buy the group, there's plenty of upside ahead, in both individual stocks and in mutual funds - even with the recent budget issues facing the U.S.

At the time of writing, Aaron Levitt did not own shares in any company mentioned in this article.

Related Articles
  1. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  4. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!