Recession Investing: Vice stocks are not all they’re cracked up to be

Today's Financial News - Posted September 2, 2008

Financial editors like to point out obvious investing opportunities. But the obvious is not necessarily the profitable. Vice stocks, especially, are not quite what they’re cracked up to be. Watch the video now…

by J. Christoph Amberger

Baltimore — (TFN): Financial editors, by and large, are an uninspired lot. Give them a couple of years at their desks and sheer habit of repetition either turns them into incurable gold bugs or into dispensers of cyclical wisdom:

It’s blather. Rinse. Repeat.

The latter group tends to operate on simple stimulus-response. Call them stock reflexologists if you will. Have a hurricane warning? They turn into oil and gas bulls. Have gold go up by a buck? They start looking for inflation in all the right places as a reason to buy more. Have a 10-20% drop in U.S. stock prices, maybe with an increase in unemployment to, say, 5.7%?

Forget Keynsian — they turn Dickensian.

Only that they’re typically young and American enough never to have experienced what an actual economic downturn looks like. Think Britain in 1984, Germany in the late 1970s, or the East Bloc 1945 to 1991.

Accordingly, their ideas of how the Common Man reacts to economic adversity often strike me as, well, quaintly suburban.

In this sheltered world, the masses plagued by unemployment “traditionally” turn to “vice”. Much like your average local NPR commentator invariably blames increased smuggling of cigarettes in Maryland on 4.7% unemployment and “people having to keep their money together,” the stock reflexologist automatically looks at sin stocks.

Alcohol. Tobacco. And of course, Gambling.

Because that’s what the unemployed do…

Then, there is real life: If drifters, grifters, and the involuntarily idle are indeed crowding into casinos, it’s news to casino stocks such as MGM Mirage (NYSE:MGM). The stock chart indicates that this classic sample of a sin and gambling stock is following the overall course of the wider equity markets — if anything, worse, since the stock is down almost 70% from its 52-week high.

So, by the way, is Las Vegas Sands Corp. (NYSE:LVS), making Wynn Resorts (NASDAQ:WYNN) look almost like a winner, with just 45% losses.

Maybe investors should keep in mind that in real life, the economically depressed may not have the cash to fly to Vegas, either…

Of course, economic downturns do create sector-specific opportunity. They may be a bit harder to find these days, but there are Darn Good Investment (DGI) stocks out in the market right now…. companies with profits, growth, and stunningly low P/Es that can make up for short-term fluctuations with medium-term double-digit gains. My colleague Laura Cadden has discovered one of these rock-solid companies with strong revenues and profit growth. We will release more information on this stock this coming Thursday during our TodaysFinancialNews.com Hot Stock Pick of the Week.

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