Ever heard the phrase “so good, it’s sinful?”
Often referring to decadent desserts or other guilty pleasures, it also applies to an entire subcategory of stocks. “Sin stocks” include companies that deal in tobacco, booze, gambling, and other not-safe-for-work industries.
Historically, sin stocks perform well during recessions.
According to financial researchers Ozkan and Xiong, these stocks beat the S&P 500 index during many recessions:
Merrill Lynch recently examined the performance of alcohol, tobacco and casino stocks in all recessions since 1970 and found that while the S&P 500 fell by 1.5% on average, sin stocks raised on average 11%.
That’s across all the recessions since 1970. We can see it clearly in the data from the 2008 crash.
From January 2009 to December 2012, the S&P 500 Index was up 55%. Phillip Morris’ stock was up 90%. That’s a 35% difference.
People will cut spending in hard times, but they don’t drop their bad habits. So, they may not go to the mall — but they will still buy beer. And it means that sin stocks are what we call countercyclical: They rise in value as the broader market falls.
This style of investing has worked well in the past.
Just look at the performance of two big tobacco companies, Philip Morris and British American Tobacco, after the 2008 recession. Phillip Morris returned over 180% to investors from March 2009 to May 2012. British American Tobacco returned 136% from March 2009 to May 2012.
These stocks both outperformed the S&P 500 Index, which rose just 40% over the same period.
That’s good news for us, because the U.S. is teetering on the brink of recession right now. From March through June 2020, over 40 million people applied for unemployment benefits in the U.S. This number doesn’t count millions of other laid off workers.
U.S. gross domestic product (GDP) fell 4.8% in the first quarter of 2020. GDP is the measure of all the goods made and services performed in the U.S. It’s a rough measure of economic activity. According to The New York Times, that decline was the second-worst quarterly fall in 15 years.
Only one other three-month period was worse: in the heart of the Great Recession.
The economy isn’t the stock market. In this case, that’s good news. However, we need to prepare for tough times.
If we rely on historical data, then we know we want to own sin stocks.
And an easy way to do it is through the AdvisorShares Vice ETF (NYSE: ACT). This fund tracks a group of these stocks. And it is already up 45% from its low in March. That’s better than the S&P 500 Index, which is only up 36% over that same period.
This fund tracks a group of these stocks. And it is already up 45% from its low in March. That’s better than the S&P 500 Index, which is only up 36% over that same period.
So take a lesson from history. Put some money to work in the “sin stocks” and let them protect you from the looming recession.
Another important lesson from history: never invest with your emotions. That’s why — during a time when emotions are high — one expert has released a video that explains how YOU could zero in on gains in ANY type of market. He calls them his “3 Alpha Rules” and he’s used them to notch gains as high as 308%, 573% and even 647%.