Babes, Booze and Betting–Guilty Pleasures Investors Should Live Without

November 6, 2009

We all have our vices. And while it’s not my place to judge other people’s habits, as an investment advisor I have to warn you that now is the time to kick some of the “sin stocks” from your portfolio. Holding on to these guilty pleasures is bad for your financial health.

It’s true that when the economy turns south, Americans embrace their vices more than ever. Just look at companies like Altria (MO), the corporation behind Marlboro cigarettes, that reported solid year-over-year profit and sales growth in the fourth quarter of 2008 thanks to steady demand for its tobacco products. When the economy started to crater, many people reached for a smoke to deal with the stress.

Hard economic times won’t stop consumers from indulging in their vices—gamblers will keep betting, bar-hoppers will keep drinking and smokers will keep puffing. But as more signs of an economic recovery are emerging every day, cashing in on “corruption” doesn’t trigger the same rush it did just a few months ago.

Here are some guilty pleasures that you should really give up to keep your portfolio safe:

Gambling Stocks Hit a Cold Streak

When gamblers say, “The house always wins,” they’re right. Casinos generate boatloads of money this way. In 2008 alone, MGM Mirage (MGM)—the largest operator in Las Vegas—made over $7 billion in annual revenue.

But is the company a cash cow? Absolutely not. The economic downturn and a crushing debt load have brought this firm to its knees. The real gamble here is investing in this stock.

The story is the same for stocks like International Game Technology (IGT)—a company that produces slot machines and other gaming products. While IGT turned a profit this quarter, its revenue stream is in precarious shape, and I give the stock a D rating for its current sales growth trend.

Don’t roll the dice on either of these companies. I rate MGM a “Sell” and IGT a “Hold.”

Booze Stocks Run Dry

Traditionally, alcohol stocks have always been a safe haven for investors seeking to protect their profits in down markets. Most brewers and bottlers aren’t susceptible to dramatic sales declines. But this recession has been anything but traditional, as high unemployment and low job security have a lot of consumers sticking to tap water.

Diageo (DEO), the owner of such brands as Captain Morgan, Johnnie Walker and Tanqueray, is by far the world’s largest spirits maker. The company has established a distribution fortress thanks to this strong portfolio. But with weak consumer spending and slower international growth, I expect DEO will continue to face significant headwinds in the short term. In October, the company surprised the market with a 6% drop in first-quarter sales. Compared with the same period last year, DEO’s sales grew 6%, only to drop in the quarters that followed due to recessionary pressures. Looking forward, the spirits-maker now sees low single-digit profit growth for the current year.

Part of Diageo’s problem may be its premium positioning—that is, higher-priced, better-quality spirits. With consumers still very much strapped for cash, it seems more people are trading down to lower-priced, lower-quality alcoholic beverages.

But even cheap booze like beer isn’t selling as well as it used to. Molson Coors (TAP), the fifth-largest brewer in the world and the maker of such brands as Coor’s Light and Blue Moon, recently reported that its operating earnings in the latest quarter jumped 37%. However, worldwide beer volume remains soft, which is why TAP rates poorly in the area of sales growth.

Girls, Girls, Girls

Hugh Hefner, founder of Playboy Enterprises (PLA), is proof-positive that sex sells. But while the 83-year-old king of the bunny-burrow is still going strong, PLA is on life support.

The company just reported a narrower quarterly loss for the third quarter of 3 cents a share compared with the same period a year ago, but revenue fell across all of its major business segments.

Playboy has lost money for seven quarters in a row. And it doesn’t look like the situation will improve much in the short term, either. In fact, the company recently announced that it’s cutting the circulation numbers of its magazine by over one million. Clearly, this is not the sign of a healthy and growing company.

Even Rick’s Cabaret (RICK), which owns and operates adult nightclubs and websites, isn’t the boon for investors it once was. Sure, the company is faring better than Playboy, but its sales and earnings growth is mediocre at best.

Choose Your Vices Carefully

Even though vice stocks have typically done well when the economy heads south, the allure of the forbidden fruit has lost its luster. The reality is that the current recession has profoundly impacted consumers’ spending habits, and this has taken a major toll on all businesses in one way or another.

Investors are sobering up to the fact that porn stocks like PLA have lost their edge due to poor management, gambling stocks like MGM are being anchored by a heavy debt load, and booze stocks like DEO are staring at the bottom of the glass.

This is not to say that these vices won’t regain their appeal soon—after all, the lure of sinful pleasures is a part of what makes us human. But as with all things in life, moderation is key.

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