Conventional wisdom has it that sin stocks – booze, cigarettes, gambling – are a solid bet: safe, reliable, and recession-proof. Increasingly, however, it is clear that these entities are not reality-proof.
Consider British American Tobacco, the venerable group that has ushered many a soul from their first cigarette to their premature, smoking-related death (smoking remains the world’s leading preventable cause of death). BAT recently announced sweeping job cuts as it tries to reinvent itself as a vaping and tobacco heating business.
The switch to vaping comes as consumers have increasingly turned away from traditional cigarettes in favour of flavoured vaping products, which have enjoyed double-digit growth – a lot of it driven by teenagers who never smoked cigarettes but who enjoy the buzz and flavours of vaping products. BAT is racing against competitive upstarts like Juul to grab a piece of this new market as it grapples with falling cigarette sales.
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But even the sexy vaping market is not without its health risks. Vaping companies have long been accused of using marketing to hook young consumers, just like the traditional cigarette market did in its heyday. Now, its problems are accumulating fast.
In the US, health authorities are investigating hundreds of cases of lung problems associated with vaping. Doctors are urging people to stop vaping and Donald Trump is threatening to pull vaping products – especially the sweet flavours that are targeted at kids like Froot Loops – off the shelf. Some states have already done so.
Read also: America pondering banning vaping on teen epidemic worries
Thus, it seems that BAT may have jumped out of the frying pan of traditional cigarettes into the vaping fire. The company’s battered share price has illustrated the costs and risks of being in an industry now widely seen as a watchword for corporate evil.
And what about booze? Well, even there, things have been rocky. In the US and UK, young people are drinking less and sobriety is trending. Traditional beer and spirits giants have seen their sales stagnate or fall in many markets as people overall drink less and switch from big brands to niche products – think about the popularity of small-batch gin and craft beer.
In response, many booze companies are doing the unthinkable: creating new non-alcoholic drinks. Despite their new endeavours, however, many big beer and spirits companies have seen their share prices fall in line with slower sales.
All of this is to say, basically, that sin isn’t what it used to be. Changing consumer preferences and rising concern about the negative health implications of products like liquor, beer, cigarettes, and vaping pods are pushing consumers away from these categories. At the same time, regulators are taking a closer look at the marketing strategies and health effects of these products, piling on additional pressure.
What does this mean for investors? Well, in all likelihood, it means that the future of sin stocks may well look different from the past. Traditionally, these companies have delivered reliable profits, strong cash flows, and best of all, outperformance during recessions (when everyone needs a drink).
As health concerns multiple and consumer tastes change, it may be harder for these companies to deliver these benefits. Although many sin stocks still trade on attractive multiples, they probably don’t represent the safe bet they did 20 years ago. The world has moved on.
