Should You Buy Sin Stocks?

Does vice pay? It depends on where you look.

Indeed, there’s plenty of evidence which shows that vice or sin stocks outperform the market (more on this later) although a recent study published in The Journal of Law and Financial Management, a publication of The University of Sydney, questions these results.

The study was conducted by Greg Richey, a lecturer of finance at California State University, San Bernardino who, in his own words, was looking to determine, “how the individual vice industries have performed against the market portfolio”.

Abstract:

“This article examines the return characteristics of a portfolio of US ‘vice stocks’, firms that manufacture and sell socially irresponsible products such as alcohol, tobacco, gaming services and national defense. First of all, I construct a portfolio using the daily returns of 41 vice stocks over the period October 2007 to October 2013 and find the Jensen’s alpha (CAPM), Fama-French Three Factor and Carhart Four-Factor results for the entire portfolio, the entire portfolio during bear and bull markets, and each vice industry individually. Full-period results show a positive, yet insignificant alpha for the entire portfolio and each vice industry. Bear market results show a positive and significant alpha for the entire portfolio as well as for all industry portfolios except the tobacco industry. Bull market results for the portfolio are less conclusive with a significant alpha only in the three and four-factor models.”

Source: Richey, Greg M., Can Naughty Be Nice for Investors: A Multi-Factor Examination of Vice Stocks (August 3, 2014). Journal of Law and Financial Management, Vol. 13, No. 1, June 2014, pp. 18-29. Available at SSRN:http://ssrn.com/abstract=2475646

These results conflict with the findings of many other studies, all of which have concluded that vice stocks do outperform by a significant margin over the long-term. It should be noted that Greg Richey’s study only covers six years of performance. Other studies look at returns over several decades of returns.