Sin Stocks
In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about sin stocks.
Introduction
Sin stocks are shares of publicly traded companies that are indulged in business activities or industries considered unethical, corrupt, or unpleasant. It is referred for companies involved in sectors dealing with morally dubious actions. Traditionally, the sectors mainly included weaponry, alcohol, gambling, and tobacco. Ethical investors, that is investors who believe in socially responsible investing, exclude sin stocks since such companies tend to make money by exploiting society and the environment.
Diverse cultures have different opinions on what constitutes a sin, making it a relative concept. Generally, sin stocks include alcohol but for instance, brewing beer or making wine is considered a noble tradition in different parts of the world. While some investors disregard weapon production on account of ethical basis, serving in the military can be considered as an act of patriotism by others.
Understanding Sin Stocks
Sin stock sectors often include tobacco, alcohol, gambling, weapon manufacturers, and sex related industries. They can also be categorized by the regional and societal expectations of our society which varies across the world. Political beliefs can also influence what is considered as a sin stock. Some people include military contractors, while others consider supporting the military a sign of patriotism. Sin stocks, also known as “sinful stock”, are on the opposite side from ethical and socially responsible investing whose main aim is to find investments that give an overall benefit to the society.
It is difficult to categorize sin stocks, as sin relies on the personal feeling of the investor towards the industry. Alcohol producers like Anheuser-Busch and tobacco firms like Phillip Morris are often on the list of sin stock. Even weapon manufacturers like Smith & Wesson are on those lists. A company like General Dynamics may not make the list, depending upon the investor’s views on supplying weapon systems to the military. Many gambling stocks are linked to hotels, such as Caesars Entertainment Corporation or Las Vegas Sands Corp. Therefore, it can also be difficult to disentangle the sin portions of some businesses.
Benefits of Sin Stocks
Investing in sin stocks may be objectionable to some investors. However, many of these sin stocks are sound investments. The essence of their business ensures that they have a steady flow of customers. The demand for their products or services is relatively inelastic (an increase in the price of the good does not decrease the demand of that good to a great degree and vice versa), making their business more recession-proof than other companies. Due to the social and regulatory risks, competitors get discouraged from entering the market, thus adding to the downside protection. The lesser level of competition ensures big margins and stable profits for sin stocks.
Some researchers suggest that sin stocks may also be undervalued. The negative depiction of sin stocks causes analysts and institutional investors to avoid them, making them more attractive to investors willing to take the risk. Several of the biggest sin stocks generate amazing long-term record of shareholder value.
Disadvantages of Sin Stocks
Sin stocks face a greater political risk than most other stocks, which may translate into higher risk of declaring bankruptcy. Furthermore, sin stocks face a greater risk of being declared unethical and forced out of business. The first step towards outlawing an industry is directly related to its public perception. For instance, prohibitions on drugs and alcohol would’ve seemed very strange in the 18th century in the U.S. while, it seemed completely normal during parts of the 20th century. This is due to the public who began to associate alcohol and drugs with various crimes taking place in the 19th century before these bans.
Sin taxes are a threat that is faced by sin stocks even when they are not outlawed. This is due to the political and economic factors. Politically speaking, many conservatives who are generally opposed to taxes are willing to cast their vote for taxes on practices they consider immoral. From an economic standpoint, sin taxes are supported, resulting in higher taxes for sin stocks. Whenever a good or service is taxed, some people reduce its consumption in response to the tax, resulting in, not producing any tax revenue. Moreover, it decreases the happiness of people who would otherwise consume the good or service. Such a typical result of a tax is a deadweight loss for community. However, it can be argued that taxing a sin stock, for instance, tobacco, benefits the society as lower tobacco consumption eventually progresses health and lowers medical expenses.
Conclusion
In conclusion, the decision to invest in stocks questions the general issue of socially responsible and ethical investing – and whether you feel that your principles should influence your principal.
Some investors believe that it is up to individuals to decide whether they want to smoke, drink, or gamble, despite the risks. Other investors think that the companies producing these products are partly to blame for individuals’ consumption, especially when that consumption becomes addictive, and products are engineered to be addictive.
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About the author
The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).