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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
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Get Four
|  | SEPTEMBER 14, 2004
The Wages of Sin Stocks [Page 2 of 2] Q: You also invest in aerospace and defense. Which stocks there? And has war in Iraq helped? A: Defense stocks actually lagged in 2003, and we told people that historically defense stocks do well toward the end of, or following, conflicts. Defense stocks have done very well so far in 2004. Something interesting that's helping to drive defense stocks is the fact that Kerry and Bush are both wanting to appear very strong on defense. A couple of our favorites -- our No. 1 holding -- is L3 Communications (LLL ). We love their acquisition strategy, their growth, and the fact that they're a very technology-based contractor. Another favorite is Northrop Grumman (NOC ). A smaller-cap defense contractor is United Defense Industries (UDI ). Q: What about Boeing (BA )? A: We don't own Boeing, and they've rebounded fairly nicely recently, but just because they've been so beaten up the past few years, and because we have so many other great choices in that industry. Others that we own that I haven't mentioned yet include Lockheed Martin (LMT ) and United Technologies (UTX ). General Dynamics (GD ) is another. We simply like these better than we like Boeing, and we continue to be fearful of Boeing's exposure to the airline industry. Q: How do the fund's holdings divide up among the sectors you invest in? A: Fairly evenly. We have about 26% to 27% in gaming, about 26% in defense, and about 24% in alcohol. We have less than 20% in tobacco -- actually, closer to 16% in tobacco, mainly because there are so few stocks to pick from. We do have less than 10% of the portfolio in what I would just call "other," but they're mainly leisure-oriented stocks, and there are just a few. Q: What gave you the inspiration for the Vice Fund? A: Well, I do manage three other mutual funds, and we've been managing money at mutuals.com since 1994. For the inspiration, very simply, when we were managing money through the downturn of 2001-2002, in mid -'01 we really started to take notice of certain industry names popping up near the top of the three- and five-year performance rankings. Alcohol, gaming, tobacco -- these were all near the top, since the rest of the market had fallen off badly...we actually began to joke that these so-called sin-stock industries would have greatly outperformed the majority of the socially responsible funds. Then we turned it into serious research. Q: You mentioned smaller-cap growth -- what are some of your stocks in that area that you might not have talked about yet? A: There are actually two stocks outside of our main industries that I like a great deal -- SCP Pool (POOL ) and Guitar Center (GTRC ). Again, they're both leisure-type stocks. They have great upside potential. It's pretty rare that we go outside our four main industries -- we have to like a stock a lot to do so. In gaming, there are a number of small-cap growth stocks in addition to what we've already mentioned. We like Scientific Games (SGMS ). They're mainly in the lottery and parimutuel business. Penn National Gaming (PENN ) is another. Q: What criteria do you use to pick stocks for the Vice Fund? Do you lean toward growth vs. value? A: I actually am very much against some fund managers who seem to let their computer screens manage their funds more than they do.... We very much believe in old-fashioned fundamental stockpicking, and when we buy a stock, we buy it with the intention of owning it indefinitely. Q: How big a chunk of a portfolio do you think an investor should put into "sin stocks" -- or your fund? A: I think it depends on each individual's situation. We think our fund can make a sizable portion of someone's portfolio -- only because it has built-in diversification between large cap and small cap, and growth and value. Other than that, they have to realize that they're investing largely just in four industries, but once again we think our fund has built in diversification over what most people think are sector funds [which are largely in one industry only.]
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