Sin Stock

What Is a Sin Stock?

A sin stock is a publicly traded company involved in or associated with an activity that is considered unethical or immoral. Sin stocks are generally in sectors that deal directly with morally dubious actions. They are perceived as making money from exploiting human weaknesses and frailties.

Understanding Sin Stocks

Sin stock sectors usually include alcohol, tobacco, gambling, sex-related industries, and weapons manufacturers. However, they can also be defined by regional and societal expectations that vary widely across the globe. For example, brewing has a long tradition in much of the world, so alcohol stocks are not necessarily considered sin stocks by everyone. Political leanings can also influence what is branded as a sin stock. Some people's lists will include all military contractors, while others may consider supporting the military a patriotic duty. Also known as "sinful stocks," sin stocks sit on the opposite end of the spectrum from ethical investing and socially responsible investing. The goal of these other investing styles is to seek out investments that yield an overall benefit for society.

Sin stocks are difficult to classify with any certainty, as sin depends on an investor's personal feelings toward an industry. That said, tobacco firms like Phillip Morris are often on the list, as are alcohol producers like Anheuser-Busch. Weapons manufacturers like Smith & Wesson make the list too. However, General Dynamics may not, depending on your views about providing weapons systems to the military. Of course, many gambling stocks are tied to hotels, such as Caesars Entertainment Corporation or Las Vegas Sands Corp. It can be hard to disentangle the sin portions of some businesses.

Benefits of Sin Stocks

Investing in sin stocks may be disagreeable to some investors. However, the fact is that many of them are sound investments. The very nature of their business ensures that they have a steady stream of customers. Since the demand for their products or services is relatively inelastic, their business is more recession-proof than other companies. There are also social and regulatory risks that discourage competitors from entering the market, which adds to the downside protection. This lesser degree of competition ensures fat margins and stable profits for sin stocks.

Some research suggests that sin stocks may also be undervalued. Their negative images lead analysts and institutional investors to shun them. That makes sin stocks attractive to investors willing to take the plunge. Several of the biggest sin stocks have great long-term records of generating shareholder value.

More interesting is the fact that many financial stocks in socially responsible investing funds were caught up in the subprime mortgage scandals of the 2008 financial crisis. That puts the whole question of sin in a new light. Is selling people booze worse than putting them into houses they can't afford and financially ruining them? It all depends on your moral code.

Disadvantages of Sin Stocks

Sin stocks face far greater political risk than most other stocks. Some companies are at greater risk of declaring bankruptcy. However, sin stocks face a higher risk of being declared morally bankrupt and forced out of business. The public perception that an industry is immoral is the first step toward outlawing it. For example, prohibitions on drugs and alcohol in the U.S. during parts of the 20th century would have seemed very strange in the 18th century. The public began to associate alcohol and drugs with various crimes in the 19th century before these bans took place.

Even when sin stocks are not actually outlawed, they still face the threat of sin taxes. There are both political and economic reasons why sin stocks are more likely to be taxed. Politically, many conservatives are generally opposed to taxes but willing to vote for taxes on behavior that they consider immoral.

There is also an economic argument that tends to support sin taxes, resulting in higher taxes for sin stocks. Whenever a good or service is taxed, some people will reduce consumption in response to the tax. This reduced consumption does not produce any tax revenue. However, it does decrease the happiness of people who would otherwise consume the good or service. The typical result of such a tax is a deadweight loss for society. However, it can be argued that taxing a sin, such as tobacco, actually benefits the community. Lower tobacco consumption ultimately improves health and reduces medical expenses.