This article is part of a Real Money series on a dozen companies investors should consider adding to their watch list of so-called "vice stocks."
Smith & Wesson (SWHC) and Altria Group (MO) have so far been leading the charge among stocks in Real Money's "Vice Squad" watch list, a group centered on consumer alcohol, tobacco and gambling stocks.
And Paul Coughlin, founder and portfolio manager of Longroad Asset Management, has been reaping the rewards from a similar strategy he attributes to strong consumer loyalty among these industries.
Coughlin's fund has booked roughly 10% year-to-date returns vs. a less than 2% rise in the broader S&P 500, with stocks tied to casinos being the largest drag on the portfolio amid heightened regulation and waning growth in Macau's gaming industry.
In addition to the durability of global-consumer brands, the watch list also stands to gain from a the disposition among some shareholders to shy away from so-called vice investments, which could create an artificial discount in their market prices, Coughlin added.
Coughlin began assembling his Old Greenwich, Conn.-based portfolio about three years ago, booking a 25% gross return last year alone.
But firearm stocks have been hot, with Smith & Wesson shares up 89% from their lows last summer and 13% in June alone, buoyed most recently by concerns of regulation stemming from the June shooting massacre in Orlando, in which 50 people were killed at the Pulse nightclub. (Fellow Vice Squad firearm stocks Vista Outdoors (VSTO) and Sturm Ruger (RGR) are up 8% and 5%, respectively so far this year.)
Analysts at Wedbush Securities recently increased their fiscal 2017 earnings guidance on Smith & Wesson to $0.26 per share, from $1.61 to $1.97, and $0.04 above the high-end of management's, guidance, citing roughly an expected increase of demand surrounding the Orlando tragedy to persist for at least one quarter.
"Longer term, we continue to be encouraged by strong underlying trends in concealed carry, which helps generate sold growth for the industry," Wedbush analysts James Hardiman and Sean Wagner said in a June report.
"Medium term we believe that there is the potential for a politics-driven bump in gun purchases as we close in on the presidential election in large part due to the next president's ability to reshape the Supreme Court, the result of which could have an impact on gun rights," they added, noting that Democrats taking control of the Senate in the coming election season "is the only scenario that effectively changes the likelihood of meaningful and lasting legislation."
Cigarette maker Altria Group (MO) has so far been the second-best performer among Vice Squad stocks, with shares climbing 10% since the watch list's April launch, boosted by a recent earnings beat, sales growth among smokeable and smokeless products, and roughly $1.1 billion in dividends paid out so far this year.
"If the market continues its precarious ways, we like Altria as a solid defensive name," Real Money Pro's Robert Lang said in a recent report, noting the momentum in its technical trade patterns, and relative strength against the broader market.
Real Money's Vice Squad Watch List
- Diageo (DEO)
- Molson Coors (TAP)
- Constellation Brands (STZ)
- Reynolds (RAI)
- Altria Group (MO)
- Philip Morris (PM)
- Vista Outdoors (VSTO)
- Smith & Wesson (SWHC)
- Sturm Ruger (RGR)
- Wynn Resorts (WYNN)
- Churchill Downs (CHDN)
- Las Vegas Sands (LVS)