Crush the Market with the "Sin Trade Trifecta"

“All we need to round out this portfolio is a tobacco trade,” a reader suggests.

Hmmm… I think you might be onto something here. We do need to add a tobacco trade to the portfolio.

As this reader mentioned, we need to round out our sin stocks. Last month, I told you about how “Big Beer” continues to jostle for position and fight for new acquisitions in the craft brewing space, which has sent many of these stocks toward new highs.

Then we jumped into a firearms trade with our controversial coverage of Smith & Wesson and Sturm Ruger & Co.’s market-crushing performance in 2015.

So we’ve got booze and guns covered. Now we just need to throw cigarettes in the mix and we’ll have our very own little “ATF Portfolio.” Catchy, no? It’s the “sin trade trifecta” as our impish reader put it.

And it just so happens that tobacco stocks are ripping to new highs right now. What timing!

Now, do I need yet another disclaimer today? I’m not saying you should go out and buy a truckload of smokes and booze—and then hit the firing range. I’m not running some sort of Hunter S. Thompson fantasy camp here. It just so happens that these are the stocks outperforming a sluggish market right now.

If you don’t like it, don’t blame me– I’m just the messenger. Blame your fellow investors for buying these stocks. And buying they are. Take a look:

Smoke 'Em If You Got 'Em

You can’t argue with these results. Altria Group (Marlboro’s parent company) just posted new 52-week highs yesterday. The stock is up nearly 21% in 2015. Reynolds American (of Camel and Pall Mall fame) is up more than 47% year-to-date.

So what gives? Are more folks smoking these days?

Nope. In fact, the number of smokers in America continues to decline. Only about 15% of American adults smoke, according to the Centers for Disease Control and Prevention. That’s a huge drop from 1990, when 25% of adults puffed on cigarettes.

And to add insult to injury, some major chains such as CVS have actually halted the sale of smokes at all their locations. You can’t even buy a pack of cigarettes at the drug store anymore.

So what are the big cigarette companies doing to juice their performance?

“As smoking rates fall, tobacco companies have managed to boost revenue by increasing cigarette prices. Altria, which controls more than 40% of the U.S. cigarette market and makes the top-selling brand Marlboro, has posted revenue gains in the last three quarters along with double-digit EPS gains,” Investors Business Daily reports.

“But price increases can only go so far. So tobacco companies are looking at alternative products to attract millennials attuned to the negative effects of smoking, as well as current cigarette smokers seeking what’s perceived as a healthier alternative.”

Yep, you guessed it. Along with raising prices, big tobacco is getting into the vaping business. E-cigarettes are a small but growing phenomenon. And Big Tobacco is getting its foot in the door with its own brands of e-cigs.

So here we have a strong group of dividend-paying stocks that are thriving in a very unfriendly business environment. What’s not to love?

Now go light up a smoke. After you open a beer. And fire off a few rounds. The “sin trade trifecta” is starting to heat up…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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