"Even in bad times, folks are often not prepared to relinquish their 'pleasures'," says small cap growth stock specialist Ian Cooper.
in SC Trading Pit, he explians, "Even in shaky economic times, 'vice' stocks can generate astonishing gains." Here, he looks at a trio of issues catering to "sins" that he feels offers investors downside protection.
"When people start to worry - as they're doing right this minute - they inherently seek certain (somewhat self-destructive) outlets for comfort and hope.
"Most of the time, they're in the form of alcohol, tobacco, gambling, and other comfort and hope "vices". And when the economy's bad, these vices surge like clockwork. Smokers continue to smoke. Drinkers continue to drink. And gamblers continue to gamble.
"Investors can take a look at the Vice Fund (VICEX), which holds investments in alcohol, weapons, gambling and tobacco stocks. Over the last three years, the VICEX is up about 50% at its peak, as compared to the scant returns from the S&P 500.
"Its further proof that sin stocks tend to be recession-proof because regardless of economic environment, demand for things like booze, cigarettes and casinos typically holds steady.
"Another one to consider is Rick's Cabaret (NASDAQ: RICK). An operator of upscale adult nightclubs, it recently posted net income of $2.6 million, or 32 cents a share on revenue of $15.46 million, as compared with year earlier net of $492,344 or nine cents on revenue of $7.6 million.
"Analysts only expected 28 cents. Better still, RICK expects fiscal 2008 EPS of $2.30 to $2.50 per diluted share, on revenues exceeding $100 million.
"Another 'vice' stock is liquor distributor Constellation Brands (NYSE: STZ). The company recently posted a 50% jump in net income, and gross margins that moved 5% higher to 35%. A
"nd it still trades at a discount to peers with a forward PE of 11, as compared to Diageo's PE of 14 and Brown Forman's 18. Better yet, spirit sales were up nine percent, as wines grew 24%.
"That's proof that cash strapped consumers are still drinking, despite the economic woes. STZ earnings only confirm that with a 62% jump in earnings to 34 cents, wider profit margins, and reaffirmation of stronger EPS of $1.68 to $1.76 EPS for fiscal 2009."
