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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton
| February 28, 2018
Are you looking up to spice up your portfolio in these uncertain times?
Some investors may think that it is morally wrong to invest in the companies below. These are companies that are involved in addictive vices like alcohol and gambling. But others will disagree — and to those people, I say, read on!
“Various studies have investigated the historical performance of sin stocks and observed that they have delivered significantly positive abnormal returns” says David Blitz, co-head of quantitative research at Robeco. One popular explanation is that these stocks are systematically underpriced because so many investors shun them.
So with this in mind, I set out to find five of these “sin stocks” that all share backing from the Street’s top analysts. I used TipRanks to double-check that these stocks all have a “strong buy” top analyst consensus rating. This is based only on ratings from the last three months, and looks at analysts with the highest success rates and average return.
Without further ado, let’s delve in and take a closer look at these 5 top sin stocks now:
Prices and data are from the original InvestorPlace story published on Feb. 21. Click on ticker-symbol links in each slide for current prices and more.
Defense giant Raytheon (RTN) is the world’s largest producer of guided missiles.
“Strong broad order momentum, a large Patriot backlog, and untapped financial firepower give RTN extended EPS and cash flow per share growth potential” cheers five-star Cowen & Co. analyst Cai Rumohr.
Foreign sales are booming, with sales increasing for the last 14 years. Now Rumohr sees 2018 foreign orders exceeding 2017’s $8.5B, with healthy foreign revenue growth extending out into 2019-20. These include Patriot awards from Romania ($450 million-$500 million initial order in 2018; $2 billion total), Sweden ($1 billion), Poland ($4 billion-$5 billion but could slip into 2019), and a new unidentified European customer ($1.5 billion but in 2019).
Closer to home, rising defense spending means RTN also has ample domestic opportunities lined up. Most notably, the Harpoon replacement missile bid, an $8 billion opportunity, could be decided as soon as fall 2018.
All in all, it’s not surprising that RTN scores a first-class “strong buy” Street consensus rating. We can see from TipRanks that the average analyst price target of $231 works out at 6% upside from the current share price.
Is Marlboro-maker Philip Morris International (PM) still a sin stock?! The company is turning over a new leaf and committing to a more smoke-free future. This may sound like an oxymoron for one of the world’s largest cigarette companies, but PM now wants to build its future “on smoke-free products that are a much better choice than cigarette smoking.”
The result is a new focus on developing vapes and e-cigarettes that contain nicotine but don’t burn tobacco.
And it looks like the Street approves of this dramatic decision. In the last three months, PM has received only buy ratings from analysts. These analysts have an average price target on PM of $123.75, suggesting big upside potential of almost 19%.
Indeed, Philip Morris is currently a top pick for Morgan Stanley in the food/protein/tobacco sector.
“Looking ahead to 2018, we now believe PM will set expectations for an EPS in line with its +8-10% long-term target as the company reinvests to protect its first-mover advantage in heated tobacco and launches nationally in a broader range of markets outside Japan/Korea” stated the Morgan Stanley team recently. The firm has a $120 price target on PM.
Constellation Brands (STZ) is an international producer and marketer of beer, wine and spirits. Constellation is the largest beer import company measured by sales and has the third-largest market share of all major beer suppliers. Investing in STZ means betting on Modelo, Corona and Pacifico.
Shares in Constellation have exploded over the last year from just $160 to the current share price of $220. Luckily for investors, there appears to be plenty of further growth potential ahead. BMO Capital’s Amit Sharma has just initiated STZ with a bullish $275 price target. This translates into big upside potential of over 25%.
He says the alcohol beverage sector will remain “one of the largest and fastest-growing consumer staples segments” with an ongoing “premiumization” trend. And the analyst singles out Constellation Brands as “one of the most compelling growth investments in the staples universe.” He believes it is trading at a significant discount to peers.
Sharma is now plotting sales growth of 7%-8% and EPS growth of 15%-16% over the next three years for Constellation. Overall, we can see that this “strong buy” stock has scored seven recent buy ratings vs two hold ratings. Furthermore, the average analyst price target suggests upside potential of over 13%.
Melco: Your winning hand. So goes the slogan of top gaming operator Melco Resorts & Entertainment (MLCO). The company owns several casino resort facilities in Asian gaming capital Macau, including the famous City of Dreams (home to the world’s largest HK$2 billion water-based extravaganza!).
From a Street perspective, Melco scores a royal flush, with only recent buy ratings. Indeed, if we dig further into the ratings, we can see that the stock has received two rating upgrades in the last three months. One of these upgrades comes from top JP Morgan analyst Joseph Greff.
According to Greff, the stock’s valuation discount to peers is compelling and he is confident that a dividend raise can further narrow the gap. Looking forward, he projects rising VIP and premium mass growth in 2018. As a result Greff boosts his price target from $27 to $32 (11% upside potential). This falls just under the average analyst price target of $33.97 (18% upside from current share price).
The sweetest of all naughty stocks right now is Mondelez International (MDLZ). This multinational corporation owns all the best billion-dollar brands, from Ritz and Oreo to Toblerone and Cadbury. Mondelez may not be a traditional sin stock, but given rising obesity levels, MDLZ is veering dangerously close to the dark side.
But chocolate aside, Mondelez is looking pretty appealing from an investing perspective. Not only is Mondelez a sustainable dividend growth stock, but it is also primed for a robust 2018.
So says five-star RBC Capital analyst David Palmer. He argues that “outperformance is the norm for Mondelez” and “forecasts 2018 to be a year of steady topline improvement and double-digit total returns with additional stock upside potential through M&A.”
He ramped up his price target to $56 (28% upside potential) at the beginning of February.
Overall, this “strong buy” snack giant scored five recent buy ratings vs one solitary hold rating. The average price target indicates upside potential of just over 17%.
This article is from Harriet Lefton of InvestorPlace. As of this writing, Lefton did not personally hold a position in any of the aforementioned securities.
TipRanks offers investors the latest insight into eight different sectors by tracking the activity of 4,500 analysts, 5,000 financial bloggers and even 37,000 corporate insiders.
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