Sinful stocks

I am tempted to invest in less traditional stocks, namely in gambling companies and other industries that may be deemed to some as 'less ethical', such as tobacco and alcohol. What are the prospects for these industries, especially when stock markets are generally flat or falling?

What you are referring to are companies associated with (or are directly involved in) activities considered unethical or immoral. The thing with ethics and morality, however, is that there is no universally accepted definition of what is or what is not ethical or moral.

For example, one investor may view certain advertising campaigns as unethical and brand the product or the advertisement company itself a sinful investment. Another investor may see no ethical compromise in the same situation. So when we talk about sinful investing, there are some grey areas in defining a stock as sinful. That said, there are some sectors of the economy that are generally considered sinful, such as gambling, alcohol, tobacco and defence industries.

¤ Gambling - it just takes one trip to Las Vegas to see the extent of just how big a business gambling is in America. In Vegas alone there are numerous casino operators with market capitalisations in the multibillion dollar range. The industry also encompasses racetrack operators as well as sports betting companies. One thing is clear: gambling is not likely to go away anytime soon. If anything, gambling's popularity has soared in recent years with more and more online betting companies formed, allowing you to bet on anything from a sports event result to playing poker.

¤ Alcohol - the profitability of beer, wine and spirits has been something that companies have been capitalising on for hundreds of years. While the majority of vineyards are private, there are plenty of brewers and distillers that are publicly traded. Budweiser and Heineken beers, for example, are sold in almost every city in the world.

¤ Tobacco - despite lawsuits a few years ago and the billions of dollars spent in settlement payouts, tobacco and cigarette companies remain profitable. Even if smoking has become less 'acceptable' in America, UK, and now of course in Malta, the rest of the world continues to puff away. Huge markets remain for tobacco products for the foreseeable future.

¤ Defence - Although the defence industry represents one of those grey areas as to whether it is sinful or not, in most circles these stocks are considered sinful. The production of missiles, guns and tanks can be interpreted in different ways - either you view it as destructive and harmful to the entire human race or just to those in the country where the arms are destined, or you may feel that it is simply a pro-active measure to protect one's nation.

Regardless of your ethical or moral stance on the issue, there is no debate on the profitability of the manufacture, sale and distribution of military equipment.

These industries can offer a good place to diversify your portfolio. First of all, these companies provide relatively stable returns to investors, both in good times and bad. As the old saying goes: "What do you do to celebrate good times? - drink, smoke and gamble.

"And, what do you do during stressful and recessionary times? - drink, smoke and gamble." The returns provided by the companies related to these activities are often less prone to the cyclical downturns of the economy.

They provide respectable returns in times of prosperity as well as welcome returns during market and economic slumps. In addition to being somewhat insulated from the cyclical nature of the economy, many sin stocks are renowned for providing consistent dividend payments.

A great number of the companies in these industries have time and again turned a healthy profit and will continue to do so. By neglecting all of the companies within these industries you may restrict your portfolio's ability to make some solid gains.

It's easy to understand why - many of these businesses revolve around addiction. Gambling, tobacco and alcohol are all habit-forming products or activities. Here is where the morality argument comes in.

Few would debate that cigarette smokers or frequent gamblers are very loyal customers. But is it ethical to keep on taking a gambler's money even though he has a serious problem?

What about selling beer to an alcoholic? Clearly, there are no easy answers here and it's a decision each investor has to make personally.

Whether or not you agree with sinful investing is your own choice; however, human weaknesses and the lure of sinful pleasures are unlikely to disappear soon. If you have a long-term outlook and seek a little excitement, then investing in the above sectors could prove profitable.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com