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Markets & Stocks
A smoking stock portfolio?
June 26, 1998: 4:19 p.m. ET

So-called 'sin stocks' carry a stigma, but some people won't overlook a bargain
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NEW YORK (CNNfn) - Ken Matthews hates second-hand smoke, but he loves what tobacco is doing for his portfolio.
     The 45-year-old systems programmer from British Columbia said he's thrilled with his hefty dividends from Philip Morris (MO). In fact, he recently bought stock in rival cigarette maker RJR Nabisco Holdings (RN).
     "Philip Morris is a fabulous stock," Matthews said. "As far as the moral issue, I hate smoking, but at least I can profit from it, so it doesn't bother me as much."
     Big Tobacco is the king of Wall Street's so-called "sin stocks."
     These are companies that sell cigarettes, alcohol and pornographic videos. They run gambling casinos and publish magazines with pictures of naked women. They carry a stigma so great that some portfolio managers are terrified to list the stocks on a balance sheet. Dozens of socially responsible mutual funds shun them.
     Lucky for these companies, not everybody cares about morality and health when it comes to money.
    
Morality and money

     "The only reason it would be terrible to own tobacco is if you think the industry is going to go bankrupt," said Gary Black, a senior research analyst at Sanford Bernstein in New York. "People are nuts if they don't want to buy stocks that are trading at 60 cents on the dollar."
     Many financial advisers tell their clients to keep their social agenda separate from their investment goals. Most clients listen, the advisers said.
     Joel Isaacson, a certified financial planner and principal at Joel Isaacson & Co. Inc. in New York, said the problem with screening out certain stocks is it's hard to draw the line. He rarely sees people avoid tobacco or the other sin stocks -- unless an investor has a relative who died of cancer.
     "Once you object to alcohol and gambling, then you can raise questions about the violence in Rap music, defense contractors and environmental issues," Isaacson said. Pretty soon all you're left with is socially-conscious ice cream maker Ben & Jerry's (BJICA), he said.
     "And that will raise your cholesterol," Isaacson said.
     Peggy Ruhlin, a certified financial planner and principal at Budros & Ruhlin in Columbus, Ohio, tells her clients tobacco stocks usually account for a tiny percentage of a mutual fund's holdings. She recommends they give their profits to charity if they really object -- but she doesn't know if anybody has actually made a donation.
     "Generally, people don't care," she said. "They want to make money."
    
A good long-term buy?

     Shareholders of the Yacktman Fund (YACKX), which owns a 14 percent stake in Philip Morris, are more concerned about performance than morality, said Steve Yacktman, one of the managers. The fund has $856 million in assets and earned 3.53 percent as of June 24, according to Morningstar.
     "If you take Philip Morris over any long period, the underlying business performance has been great," said Yacktman, vice president of Yacktman Investment Management. "The individual says, 'What's the risk? I'm making money.' "
     Tobacco stocks have taken a beating because of intense pressure from politicians and health groups.
     "Alcohol and gaming aren't suffering the way tobacco is because you don't have the president of the United States talking about them," said Black, of Sanford Bernstein.
     But a battered-down stock can also be a bargain. Peter Cardillo, director of research at Westfalia Investments in New York, is recommending Philip Morris.
     "These stocks are the forgotten group -- they continue to stay dormant and move lower, but they actually become a good buy," Cardillo said. (117K WAV) or (117K AIFF)
    
Some good bets

     Likewise, Playboy Enterprises (PLA), is a good long-term investment, said Dennis McAlpine, a media analyst at Josephthal & Co. in New York. Stock rose from 11 to 17 in the first quarter, he said.
     "It's an excellent buy," McAlpine said. While one-third of institutional investors won't touch Playboy, the stigma of owning the stock has lessened substantially, he said.
     There are other companies selling adult products, but McAlpine doesn't recommend them. For example, Metro Global Media Inc. (MGMA) produces adult magazines, books and videos.
     Gaming companies are also a good bet, said Andrew Zarnett, senior gaming analyst at Ladenburg Thaimann in New York. Gambling stocks have been somewhat flat because Wall Street is nervous about major expansion plans at Las Vegas casinos. But Zarnett thinks the future is bright.
     "There are a lot of good buys," Zarnett said. "It's a far stretch to compare tobacco to gaming."
     Zarnett likes Mirage Resorts Inc. (MIR), Rio Hotel & Casino Inc. (RHC), and MGM Grand Inc. (MGG).
     As far as the alcohol stocks, they've had a mixed year, said Marc Cohen, vice president of Goldman Sachs in New York. One of the few he'd suggest buying is Beringer Wine Estates Holdings (BERW). The company is down 2 percent this year, while the S&P 500 is up 16 percent. But he sees impressive growth potential.
     "There are very small niches in the institutional investment community where there may be some sensitivity to (alcohol) investing, but it is quite the exception," Cohen said. The companies that sell cheap jug wine and malt liquor aren't publicly traded.
     For Matthews, the investor from British Columbia, owning Philip Morris and RJR Nabisco Holdings is part of a long-term financial plan. While other people may shun the sin stocks, Matthews said his dividends from Philip Morris have risen about 20 percent a year.
     "Some people have a weakness for alcohol, gambling, or tobacco," Matthews said. "But it really is a free choice issue." Back to top
     -- by staff writer Martine Costello

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.