Sin Stocks - Unethical Stocks - Quantified Trading Strategies

Learn to Invest – Quantified Investment Course Quantified Investment Strategies Sin Stocks – Unethical Stocks

A certain type of stock has done much better than the market for a long time. As a group, they are called “sin stocks”, ie “unethical stocks”.

Within this group, we find industries such as:

Tobacco
Alcohol
Arms – weapons manufacturers
Gambling
Marijuana
Brothels

This group has given several percentage points better annualized returns over many decades:

In the United States, tobacco stocks have been by far the best industry from 1900 until today. In the UK, alcohol stocks have provided the best returns.

There is a lot of academic research that confirms that unethical investments do better than the rest of the market:

Research shows sin stocks perform well

For example, professors Marcin Kacperczyk and Harrison Hong published a study in March 2006 entitled The Price of Sin: The Effects of Social Norms on Markets.

They looked at the tobacco, alcohol, and gambling industries, and the result showed an excess return of about 0.5% per month. This is substantial.

In 2016, student Karita Troberg wrote a master’s thesis called Sin Stock Returns on European Markets (Aalto University).

Her conclusions indicate that from 1985 to 2015, a portfolio of unethical equities yielded 4.7% annual excess returns relative to the market.

Why have sin stocks produced above average returns?

The money manager US Mutual has a fund called The Vice Fund, a fund that only invests in unethical shares, and in the fund’s prospectus, they explain why unethical shares provide excess returns.

Since its inception in 2002, the fund has managed a 375% return against the S&P 500’s 229% (as of December 2017).

The fund mentions five characteristics that make unethical stocks create excess returns:

Major barriers to entry for new players (due to regulation).
Steady demand for their products, regardless of the general economy.
They are all, for the most part, global players.
They have large margins in industries that require little capital.
Large free cash flow that allows for dividends and share repurchases.
Because the shares are mostly traded at lower multiples than other companies, the repurchase of shares has a greater effect.
Unethical stocks do not, in general, need to innovate new products in order to survive. For example, Apple must constantly come up with new products to survive. Tobacco and alcohol stocks do not need it.