Longroad Asset Management has been crushing the market lately in its managed account business, and founder Paul Coughlin attributes much of the gains to a portfolio built on so-called vice stocks.
The Old Greenwich, Conn.-based asset manager began assembling this account almost three years ago, with Coughlin snapping up more than a dozen stocks in alcohol, firearms, and tobacco companies. The result is that Longroad's account has raked in a more than 25% gross return last year alone, vs. a less-than 1% gain in the S&P 500.
And while many turn their backs on stocks tied to such industries -- largely because of burdensome excise taxes levied by the federal government -- the benefits of customer loyality tied to these brands far outweigh the expesnes, Coughlin said in a Monday interview with Real Money.
"Ours are all consumer stocks and global brands," he said. "We went through and picked 12-14 stocks and the only turnover we had is Beam (maker of bourbon whiskey Jim Beam) got purchased, which was a huge home run, and Vista Outdoors (VSTO) was spun off from ATK and added to the portfolio." (Sports-and-recreations retailer Vista Outoors split from Alliant Techsystems in February 2015.)
Part of the key of Coughlins selections -- which include gunmakers Smith & Wesson(SWHC) and Sturm, Ruger (RGR); alcohol producers Constellation Brands (STZ) and Molson Coors (TAP); as well as cigarette giants Philip Morris (PM) and Reynolds (RAI) -- is that their global customer bases tend to have indelible and growing preferences for U.S. brands.
"The growth in tobacco is international. All you have to do is get on a plane and head to Europe, China, or Africa, and you'll see that people smoke, and all they use is U.S. brands," Coughlin said. "It works because all of these things don't have a substitute product. They own you as a customer"
He also added that gunmaker's have been thriving in a climate of mounting political rhetoric over regulation and Second-Amendment rights.
"As a gun-company owner, we would want to have Barack Obama for a third term," Coughlin said. "He is the greatest gun salesman of all time. Anytime the government talks about taking your stuff, sales go through the roof."
Smith & Wesson shares have surged about 155%. Meanwhile Vista Outdoors shares are up more than 45% since the company's 2015 spinoff. "If Obama had said nothing, gun sales would have been moving along at just some GDP-plus rate," Coughlin said.
Longroad also is very bullish on alcohol companies, and Coughlin is the majority owner of Stanfordville, N.Y.-based Taconic Distillery, in large part because such corporations are self-insulated from economic trends given their ability to scale prices.
"When the stock market goes up, you're drinking Grey Goose, and when the stock market goes down, you're buying Smirnoff," Coughlin said.