Are Vice Stocks Losing Their Allure?

Shares of alcohol, tobacco, gambling, and other vice vendors have gained during recessions. But the sinful strategy hasn't paid off lately

By Ben Steverman

Companies that make money from sin and vice may be naughty, but that rarely prevents investors from trying to profit from them. Such stocks—especially alcohol, tobacco, and gambling companies—are often touted as great investments during economic downturns. Other vice stocks include weapon makers, defense contractors, and sex businesses.

Bad times may force people to cut back spending, the argument goes, but they will set aside cash for their vices and addictions. "Consumers do not kick their habits in tough times," Merrill Lynch (MER) strategist Brian Belski wrote in November. When Merrill Lynch examined the performance of alcohol, tobacco, and casino stocks in all recessions since 1970, it found that while the broader S&P 500-stock index fell 1.5% on average, those addictive stocks rose an average 11%.

In the current downturn, however, the naughty are still waiting for their reward. Though the recession—which started December 2007—is still underway, sinful stocks so far haven't matched their past performance. In 2008, the S&P 500 fell 39%; some vice stocks have barely kept pace while others have plunged deeply into the gutter.

Casinos Took A Dive

Tobacco makers are often cash-rich—an important attribute in tough times—and they cater to customers who can't shut off their nicotine cravings in a recession. Yet Altria Group (MO) dropped 35% in 2008, Lorillard (LO) lost 34% and Reynolds American (RAI) fell 39%. One stock that wasn't hit so hard is Philip Morris International (PM), which fell 11% since its spin-off from Altria in March.

The casino industry has seen the most damage. Take the stock performance of the five largest U.S. public casino and gaming operators in 2008: Wynn Resorts (WYNN) fell 62%, Las Vegas Sands plummeted 94%, MGM Mirage (MGM) is down 84%, International Game Technology (IGT) fell 74%, and Penn National Gaming (PENN) lost 64%. All bad bets.

In the sex industry, adult nightclub operator Rick's Cabaret (RICK) dropped 85% in 2008. Defense contractors generally did better than the market, though Boeing (BA) shares lost half their value last year.

Meanwhile, some alcohol stocks have managed to beat the market. Molson Coors (TAP) slipped 5.7% and SABMiller (SAB.L) fell 18% for the year. However, InBev (INTB.BR) has tumbled 33% just since the November merger of InBev and Anheuser-Busch, while Diageo (DEO), the British maker of Smirnoff vodka, Captain Morgan rum, and other spirits, moved down almost 34% in 2008.