What Are Sin Stocks?

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As investors have become more socially conscious about what they invest in, they may be wary of and want to avoid certain sectors that they consider unethical, such as sin stocks.

What are sin stocks? Sin stocks are shares of a company in an industry that is deemed by some as immoral. This includes tobacco companies, sex shops, or gambling ventures. Although sin stocks tend to perform well during a recession, some investors may object to investing in them.

Whether you want to avoid investing in sin stocks or are looking for a recession-proof industry to invest in, here is everything you need to know about sin stocks.

The Short Version

  • Sin stocks are shares of a company that are considered unethical or immoral by some, such as tobacco, alcohol, gambling, and firearms.
  • Sin stocks are inelastic, which means they tend to be recession-proof. However, they face more regulatory and political risk than other stocks.
  • Investors who want to avoid sin stocks and make a difference with their money can also consider investing in SRI industries.

What Are Sin Stocks?

Sin stocks are shares of companies that operate in a sector that some might consider unethical or immoral. Many investors consider sin stock companies as making a profit by exploiting human weaknesses.

Some of the traditional sin stocks include gaming, tobacco, alcohol, sex-related industries, and firearms or defense companies. Companies like Phillip Morris, Smith & Wesson, and Anheuser-Busch often appear on sin stock lists.

But there are other industries that can also be considered sin stocks, depending on the region and cultural differences. For example, in some Jewish and Islamic communities where pork is prohibited, companies that manufacture pork products may be considered sin stocks.

In other cases, a person in a culture where beer is brewed might not consider the alcohol industry harmful to invest in. Often whether something is a sin stock or not comes down to the individual and whether they think the industry is not aligned with their moral compass.

Sin Stocks in the 21st Century

As the world advances, so does what is socially considered unethical or immoral. Cannabis stocks have gained traction in recent years as it’s become legal in many states. However, cannabis still remains illegal on a federal level and because of that, some may still consider it a sin stock.

Investors who are socially conscious might also avoid companies that engage in unfair labor practices, like those in the fast fashion sector or chocolate industries, which sometimes engage in child labor. Others might want to stay away from companies that use the prison industrial complex for cheap labor.

And some investors may decide investing in companies that exploit customers as unethical, like payday loan companies which make money on high-interest rates on loans given to people who need some quick cash.

Lastly, the growing climate crisis has also caused many investors to reconsider companies that might not have traditionally been thought of as unethical. Companies that contribute to global warming, like oil companies, are often avoided by investors looking to make more environmentally friendly investments. Some may even consider a company like Amazon a sin stock, due to its massive carbon footprint and historic mistreatment of workers.

Benefits Of Investing in Sin Stocks

While not everyone wants to invest in sin stocks, they can make sense for some investors. Sin stocks are generally thought to be relatively stable, as they tend to have a steady stream of clients.

Sin stocks are considered recession-proof stocks, as demand for their products is inelastic, meaning consumers' buying habits tend to stay the same whether the price goes up or down. For example, someone who smokes or drinks is unlikely to lower their consumption because of inflation.

Meanwhile, defense and firearms companies are closely linked to the U.S. government, which has expanded its defense budget in the last 30 years.

Several studies suggest that sin stocks are undervalued as they are often shunned by most retail and institutional investors. Other reports show that sin stocks may have higher returns than the stock market (although past results do not guarantee future performance of a stock).

Drawbacks Of Sin Stocks

Of course there is risk with any investment and sin stocks are no different. Besides typical investment risks, sin stocks also face risks that other industries might not face, such as regulatory and political risk.

While sin stock companies are legal, there can be social and political pressure from groups that think they are immoral, causing a ban on products. For example, in the 1920s, the U.S. banned the sale of alcohol, which forced many brewing companies to shut down. Even today alcohol and tobacco companies face strict licensing requirements.

Many sin stock companies also face sin taxes. People who are opposed to taxes might be okay with taxing a product or sector they consider immoral. Gambling ventures, alcohol, and tobacco products all face sin taxes, which vary depending on where they operate or sell.

Sin Stocks vs. SRIs

Socially responsible investing (or SRI) has become an increasingly popular trend. SRI investors use their money to support companies that positively benefit their community or the environment and have good corporate governance policies. The idea is that investment returns and responsible corporate behavior can go hand-in-hand. In many ways SRI stocks are considered the opposite of sin stocks.

SRI companies often include solar energy companies, technology companies, financial companies and healthcare services. Sometimes SRI gets confused with Environmental, Social and Governance investing or ESG. The two are similar but the main difference is that SRI investing also specifically tries to avoid sin stocks.

Sin stocks on the other hand, are stocks that some might consider unethical. Often investors in this subsect are more concerned about profits rather than social responsibility. Someone who invests in sin stocks might argue that SRI investments pass up good investing opportunities. They would rather get a solid investment return. In comparison, an SRI investor wants to make sure they are doing good with their money in addition to getting a decent investment return.

In some cases an SRI fund can actually include companies that some may consider a sin stock. Cannabis stocks are an example of this. Not only are they considered a medical aid, many cannabis companies value fair treatment of workers and sustainability.

Some oil companies may also get a pass, especially if the oil company has a good track record of promoting advancements in alternative energy like solar or wind. However this can be controversial for some investors. If you’re trying to avoid investing in all sin stocks, make sure to find out each company an SRI fund is investing in to make sure it aligns with your personal values.

Learn more >>> Demystifying Ethical Investing (ESG vs. SRI vs. Impact Investing)

How to Decide What to Invest In

Whether or not you should invest in sin stocks really depends on personal preference. Some may not be comfortable investing in something they consider counter to their values, while others may prioritize potential financial returns over ethical or moral concerns. Make sure you know your values before you start investing.

If you are on the fence about investing in sin stocks but want to get some exposure to them, you can consider diluting your investment by investing in exchange traded funds (ETFs). An ETF will give you exposure across either one sector or multiple sectors. And it’s a good way to keep your portfolio diversified.

Regardless of how you feel about sin stocks, it’s important to do your own research before investing in sin stocks or any other type of stock for that matter. Look at the financial statements of the company and pay attention to things like cash flow, EBITDA and revenue to get an idea of how the company stands financially. You can also read analyst reports or use technical analysis to forecast price movements.

The Takeaway: To Sin Or Not To Sin? It's a Personal Choice

Deciding to invest in sin stocks comes down to personal choice and whether it agrees with your principles or not. There is no wrong or right answer, as it all depends on your personal values and investing goals.

If you feel strongly against a particular sin stock, then deciding not to invest in that sector may help you feel at peace. Ultimately you have to decide if you want to invest based on purely financial considerations or if you want to take your ethical values into question as well.

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Moriah Costa

Moriah Costa is a freelance financial journalist specializing in specializing in business and investigative reporting. Moriah obtained her Master's in Financial Journalism from City, University of London and holds a BA in Journalism from the Walter Cronkite School of Journalism and Mass Communication. Her work has appeared in Thomson Reuters, the Arizona Republic, Washington Business Journal, Benzinga, and more. When she isn't writing or reading the news, she makes art journals and travels around Europe.

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