be_ixf;ym_202007 d_07; ct_50

Select Page

Recession Alert: One Stock to Protect Your Portfolio

Story Highlights:
  • Long ago, Matt Badiali could win a pack of cigarettes by playing boardwalk games.
  • Today, cigarettes and games of chance are part of a category that we call “sin stocks.”
  • Companies that support bad habits often do well in recessions. And we expect that to happen again.
Recession Alert: One Stock to Protect Your Portfolio

When I was a child, my family vacationed in Brigantine, New Jersey, every summer. Back then, the seaside town was known for its “castle.”

The huge gothic plywood and paint structure, in the shape of an idealized medieval-style haunted castle, had turrets soaring to over 100 feet.

It featured a full cast of actors dressed as werewolves, ghouls and vampires.

Historical photo of the Brigantine Castle, black and white, on the beach.

Source: https://brigantinenow.com/looking-back-the-popular-infamous-brigantine-castle/

The castle sat on a long pier filled with games, pizza shops, cotton candy booths and soft-serve ice cream stands.

On vacation, my grandmother would hand me some quarters to play games.

I loved playing those games and winning prizes for her.

The best games sat at the foot of the castle. There were lots of typical carnival activities: water guns, ring tosses and target games.

But my favorite was a six-foot square of dimpled wood. Each dimple was a different color. The player put a quarter on a color and then tossed a rubber ball onto the wood.

If the ball came to rest on your color, you won. With only six colors, it wasn’t tough. And back then, I could win my grandmother a carton of cigarettes.

Yes, you read that right. I used to win her cartons of Pall Mall cigarettes. This was the 1970s, after all.

She, like many of her peers, quit smoking in the early ‘80s.

But in the ‘70s, a smoke break during the day was a way to relax.

To this day, 14 of every 100 Americans smoke. That means there are over 34 million smokers who use tobacco to deal with the stress of life. And life in 2020 is stressful.

Cigarette Makers Are Part of the “Sin Stocks”

Today tobacco companies are financial pariahs.

Folks feel so strongly about them that an entire subclass of socially responsible funds excludes them.

Tobacco companies are part of the so-called “sin” stocks. These include booze, gambling, tobacco, defense, weapons and adult entertainment.

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 2008.

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.

Chart showing the gains of Philip Morris stock compared with the S&P 500 Index from 2008 to 2012. Philip Morris rose more than the S&P 500 Index.

That’s good news for us, because the U.S. is teetering on the brink of recession right now. In the last 2.5 months, 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.

So take a lesson from history. Put some money to work in the “sin stocks” and let them protect you from the looming recession.

Good investing,

Matt Badiali

Matt Badiali

Editor, Real Wealth Strategist

P.S.

The ACT fund is a fantastic way to play the general sin stock trend. But the stocks that will shoot up the highest are going to be individual companies. And we’ve found one that has massive free cash flow, which means it is positioned to weather this pandemic storm well. It also pays a dividend, which lets investors park their capital and get instant income checks. You can see this stock ­– and many more natural resource investment ideas — when you subscribe to my Real Wealth Strategist newsletter. Click here to see how I pick these trends, and learn how to subscribe today.

MEET OUR EXPERTS

WHAT READERS ARE SAYING..

I am up $20,070 in closed positions from Feb. 18 through March 7.

- Bob Rowe

I started your system in December … I am ahead $29,000 … I put total faith in you and your system and it has worked for me very nicely. Thanks again I sure like your humble approach about this whole thing

- Dale Leiffer

I have made a little over $4,000 while being cautious.

- Chuck Goss

Share This