A Good Day For Sin Stocks

How Monday's Supreme Court decisions affect tobacco and weapons stocks.

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Sin stocks got a boost on Monday from a pair of Supreme Court decisions that stand to benefit the weapons and tobacco industries. In one ruling, the Court decided not to hear arguments in a major tobacco case. By doing so, the justices left in place a 2006 ruling that held that the tobacco industry defrauded the public by lying about smoking’s health impacts. While this superficially stings the tobacco industry, perhaps the bigger story is that as part of their choice to not get involved with the case, the justices rebuffed the Obama administration’s efforts to collect close to $300 billion from Big Tobacco. In a separate decision, the Court officially extended the Second Amendment to states and cities, calling the right to bear arms a “fundamental” liberty. As a result, the justices effectively gutted the Chicago handgun ban that was at the center of the case in question. 

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To get a sense of what these rulings mean for weapons and tobacco stocks, U.S. News spoke with Jeff Middleswart, the manager of the Vice Fund. As its name suggests, this mutual fund invests in a wide array of sin stocks, including picks from the tobacco, alcohol, gambling, and weapons industries. Excerpts:

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Is it fair to say that Monday was a good day for sin stocks?

Pretty much, [but with a caveat]. There’s one thing about guns rights. One of the things that was driving gun sales was the idea that there would be more bans. So taking away another ban may give people a source of relief, and they may not buy as many guns in the immediate future. But gun sales are still at pretty high levels historically and should probably remain about where they are.

In the longer term, what companies stand to benefit from the handgun ruling?

Smith & Wesson and Sturm, Ruger & Co. should do well as a result of this. You can probably even make a case for Olin, which makes ammunition, and Alliant Techsystems—they make ammunition, too.

To what extent do gun stocks depend on the economic recovery?

You’ve got two kinds of weapons. You’ve got handguns, which are the source of the litigation and the potential bans. Sales there are being driven by political risk. And then you’ve got long guns, which are for hunting—so it’s shotguns, it’s rifles, muzzleloaders, those types of things—that’s a much bigger market than handguns. But it’s not a market where people necessarily have to buy a new gun frequently; guns have a long life. You’ve seen in 2008, 2009, and early 2010 weaker than normal long-gun sales, and it’s primarily economy-related.

What are your thoughts on the tobacco ruling?

It takes away one more of the lawsuit issues that was overshadowing the industry. It’s been an industry that has continually faced blows from a number of different fronts, whether it’s menthol, or how much advertising can they do, or “light” cigarette cases, as well as constantly having excise taxes raised on them. So you’ve seen a situation where companies generate tons of cash flow—they’ve been using that money to buy back shares and help out shareholders in that regard—but when you have the event risk [and] potential lawsuit problems, that’s sort of put a downward draft behind them for at least the last three months or so. So removing that is probably going to get these things to trade a little bit more closely to what they’re worth.

What’s your outlook for tobacco stocks?

I still think you’re going to see more consolidation. I would think that at some point, a company like Lorillard would get acquired. And companies will then just seek to continue to reduce costs and to close some facilities and run the rest at full strength and full utilization to lower costs. At the same time, they’ll continue to see lost volumes in the United States and some of the other mature markets like what they’ve been seeing. But emerging markets are still growing at a fairly good clip at this point, and you’re seeing volume gains and a little bit of pricing gains on the international front.