Sin Stock

DEFINITION of 'Sin Stock'

A sin stock refers to a publicly traded company that is either involved in or associated with an activity that is considered to be unethical or immoral. Sin stocks are generally found in sectors that deal directly with activities are frowned upon because they are perceived as making money from exploiting human weaknesses and frailties. Sin stock sectors usually include alcohol, tobacco, gambling, sex-related industries and weapons manufacturers, but they can also be defined by regional and societal expectations that vary widely across the globe. For example, brewing has a long, proud 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, as 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, where the goal is to seek out investments that yield an overall benefit for society.

BREAKING DOWN 'Sin Stock'

Sin stocks are difficult to classify with any certainty as it depends on an investors individual feelings towards an industry. Is a share in a company based in a country with a history of human rights violations a sin stock? It depends on where your moral code stands on the issue. That said, tobacco firms like Altria Group and Phillip Morris are often on the list, as are booze producers like Anheuser-Busch InBev and Diageo. Weapons manufacturers like Smith & Wesson Holding Corp make the list too, but General Dynamics may not be depending on what your views are on providing combat systems and vehicles to militaries are. Gambling, of course, has a number of stock offerings that are usually tied in with hotel/real estate/entertainment like Caesars Entertainment Corporation or Las Vegas Sands Corp. In these cases, the burden on the investor to figure out just how much of the revenue is from the sinning and how much is from the other sides of the business - and, most importantly, how much you care. 

The Upside of Sin Stocks

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

Research suggests that sin stocks are also likely to be undervalued because their negative image leads to them being shunned by analysts and institutional investors. This makes them attractive investments for investors willing to take the plunge, since a number of the biggest sin stocks have great long-term records of generating shareholder value. From 2002 to 2017, sin stocks have generally outperformed socially responsible stocks. That said, moral-free indexes like the Russell 1000 have beat out both over that time. 

More interesting is the fact that many financial stocks in socially responsible investing funds were caught up in the 2008 mortgage scandals and financial crisis, putting 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.