Investing For My Sins

Published in Investing on 19 September 2012

One Fool considers weighing their portfolio with 'sin stocks'.

There's a moral dilemma surrounding investment in shares that profit from people's misfortune or vices; some private investors choose to steer clear, preferring to back other firms in the FTSE 100 (UKX) and FTSE 250 (MCX) markets that have their hands, and conscience, clean.

However, others see no harm in taking advantage of potentially, er, harmful companies, instead capitalising by investing in these so-called 'sin stocks'. Where your opinion lies on this matter, that's up to you, but personally I have long been considering adding a few to my own portfolio…

Gambling

You only have to look at the success of Paddy Power (LSE: PAP) over the last few years to see what kind of profits can be made -- its shares are up 1,000%! Much of its success has been credited to its mobile gaming sector, rolling out an online platform ready-made for smartphones ahead of its rivals. William Hill (LSE: WMH) appears to be gradually recovering after a slow adoption of online/mobile left it off the pace, while Ladbrokes (LSE: LAD) reported a 49% increase in half-year profits back in August after an increased focus on its digital business.

I feel I've missed the boat with Paddy Power's shares somewhat, but one gambling firm that does intrigue me is Betfair (LSE: BET) -- it acquired new CEO Breon Corcoran from its rival back in August, and under his leadership, with experience of building a thriving company and continuing its success as COO of Paddy Power, Betfair is one sin stock that I'm keeping a close eye on.

Drinking

It's fairly common knowledge that, through prosperous and austere economies, people will still both celebrate and find solace in alcohol -- it seems to be one of the more recession-proof sectors, and therefore makes a good candidate for retirement portfolios.

Let's take a look at some of the statistics. Shares in Enterprise Inns (LSE: ETI) ended 2011 on a price of 28p. Today, they are selling for 63p -- and this in the worst double-dip recession in 50 years. JD Wetherspoon (LSE: JDW) received a boost from the summer's events, comprising the Diamond Jubilee, Euro 2012 and the Olympics/Paralympics, and is hitting a 52-week high on 479.60p at the time of writing, outperforming the FTSE All-Share.

Of course, it's not all plain sailing. While Enterprise Inns is faring well currently, it has had to sell off a lot of its pubs to pay off debt; rival Punch Taverns (LSE: PUB) is similarly laden with debt, and is struggling to keep its head above the water. If two of Britain's largest pub owners have had to resort to closures, then I'm not convinced pubs are the safest of havens for my cash. Instead, I'm far more taken with Diageo (LSE: DGE). Global operations spanning 180 countries appeal to my sensibilities, spreading the risk through diversification as well as healthy exposure to emerging markets. Even if people cut back on going to the pub, history dictates that they'll continue to drink at home regardless, and Diageo -- with its repertoire of famous brands, including Johnnie Walker, Smirnoff, Baileys, Tanqueray, Captain Morgan and Guinness -- is perfectly placed to take advantage of this.

Smoking

The final sinful sector I'm looking at is tobacco. Wherever you're reading this article, be it at work, home or out in public, take a stroll and chances are within a few minutes you will have encountered someone smoking. The rules introduced in 2007 that banned smoking in enclosed work places -- including pubs and bars -- have barely dented smokers' enthusiasm for their beloved tobacco, and the likes of British American Tobacco (LSE: BATS) have continued to profit. Indeed, BATS' dividend has increased by 91% during the last five years, as its revenue continues to escalate.

The dangers of tobacco are well advertised. But whatever seems to be thrown at the industry -- be it the indoor ban, the restrictions on advertising tobacco products in sports such as Formula One or the recent introduction to the UK a ban on displaying tobacco products in stores -- it continues to thrive. And if I were to add to my sinful portfolio then I'd strongly consider Imperial Tobacco (LSE: IMT), thanks to its exposure to emerging markets where a burgeoning middle class are taking up smoking due to its symbol of status and, as all around the globe, its addictive qualities that will keep its customers coming back.

Foolish final thoughts

So, to recap, my personal pick of the sin stocks are Betfair, Diageo and Imperial Tobacco. The choice to invest in companies within these sectors is purely personal, and many people will easily find reasons to avoid them; here, however, I've deigned to put emotions to one side and seek high-yielding shares, with Betfair offering a reasonable chance of growth, too.

Of course, there are plenty of companies in the markets that can offer similar returns, in sectors that don't split opinion as often as those stated above. You can find out which areas Motley Fool analysts believe are favourable and offer potential opportunities for long-term investors in our special free report, "Three Top Sectors". Our analysts also give their top recommendations for companies within each sector, and you may well be pleasantly surprised by their names… so what are you waiting for, the report is free and will be delivered to your inbox immediately -- just click here!

He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".

Further Motley Fool investment opportunities:

> Sam does not currently own any of the shares mentioned in the article -- although he's considering three of them...

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

HousingBear999 19 Sep 2012 , 7:38pm

I'm in danger or moralising, but the idea of lowering the cost of capital for tobacco companies to get those in emerging economies hooked is something I'm keen to avoid. Plus I myself smoke, so you might argue it's hypocritical/patronising moralising on my part! I agree that Betfair looks interesting though - surely a market for cutting out the middleman and allowing punters to wager direct with each other.

kempiejon 20 Sep 2012 , 1:21pm

Bankers are the new sins. Their dispicable and morally bereft behaviour hasn't even been that profitable for me.

Invest in the Bs baccy, beer, bets, bombs and bankers

NK104 20 Sep 2012 , 7:57pm

To paraphrase the late, great Ian Drury....

Fags and booze and drugs and guns
Are all that my portfolio needs.

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