The First Cut: Investing in Vice

    by John Bajkowski

    The First Cut: Investing In Vice Splash image

    If you gain comfort by restricting your investments to companies considered to be socially responsible—stop reading now!

    Socially responsible investing integrates social and environmental considerations into the stock selection process. For example, it is common to avoid companies providing products and services related to alcohol, the military or weapons, gambling, and tobacco.

    Some investors—call them “social contrarians”—argue that these commonly avoided industries offer attractive diversification benefits by selling recession-proof products and, because they are avoided by some, may be undervalued. For example, the Vice Fund (VICEX) concentrates its investments in the alcohol, aerospace/defense, gaming, and tobacco industries.

    This First Cut presents exchange-listed “vice” stocks within the alcohol, tobacco, and casino/gaming industries. The top 30 stocks with the lowest dividend-adjusted PEG ratio made the First Cut.

    The PEG ratio is computed by dividing the price-earnings ratio by the sum of the dividend yield and the expected long-term earnings per share growth rate to consider the total return potential of these stocks relative to their valuation. The lower the PEG ratio, the greater the potential for attractively priced stock. One-time events, however, can distort such ratios. For example, profits from the sale of publishing and broadcasting subconcession rights in Macau by Wynn Resorts contributed to its low PEG ratio.

    The table lists the latest fiscal-year earnings per share along with the expected earnings for the next two years to indicate expected short-term growth, while the long-term expected growth rate provides further insight into expectations priced into these stocks.

    The 52-week price change provides some insight into the relative price strength of these stocks over the last year.

    Whatever your beliefs lead you to invest in, success ultimately depends on selecting sound investments.

    —John Bajkowski
    AAII Vice President, Senior Financial Analyst


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