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Stocks & Bonds

Sin Stocks in Purgatory

Our gaming picks went bust and tobacco makers got smoked. But Bud proved to be a wiser choice.

Our February 2008 story on The Virtues of Vice Stocks was based on solid reasoning: People continue to drink, smoke and gamble no matter what the economy does.

Companies that aid and abet two of those three sins have held their own during the present unpleasantness. As a result, our eight picks tied the market, on average: Over the past year through December 5, the stocks lost 41% as a group, matching the decline of Standard & Poor's 500-stock index (not including dividends).

What we didn't count on was that the biggest sin in 2008 would be debt and how costly it can be in a credit crunch. The stock of MGM Mirage (MGM) was our worst performer, plummeting 88%.

MGM's revenues weakened as gamblers decided that frequenting casinos might not be a smart bet in these tough times. But just as harmful was MGM's high debt load -- about $13 billion -- and the need to keep debt high to finish grand projects, both in the U.S. and abroad. Depressed casino revenues also hurt International Game Technology (IGT); shares of the slot-machine maker dived 75%.

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Tobacco sales held up fine, but crippling debt also hurt Imperial Tobacco Group (ITYBY.PK), down 54%.

Our two other tobacco companies, British American Tobacco (BTI) and Altria (MO), did relatively well. British American was down 35%. Altria, recommended at $78, spun off Philip Morris International to shareholders last March. The price of one Altria share and one PMI share add up to $57, representing a 26% loss.

Likewise, alcohol is a sin with staying power. Shares of Diageo (DEO) and AmBev (ABV) were down 38% and 46%, respectively. But both companies reported increased sales in their most recent quarters and project improved sales next year. And both stocks yield more than 5%.

Our one winner was Anheuser-Busch, which we recommended at $53. InBev bought the iconic American brewer in November for $70 a share -- a 32% gain.