Tags: hutchinson | vice | stocks | economy

Vice Stocks Should Thrive in a Sputtering Economy

By    |   Monday, 22 August 2011 08:40 AM

The country's current trajectory is not good. A sputtering economy with no coherent plan to improve things, huge unfunded liabilities and skyrocketing debt don't inspire much hope for the future. The prognosis seems to be slow growth (if not recession) in the near and intermediate terms and catastrophe a little further out.

While the stock market had remained resilient through bad economic news in the spring, the recent turn-for-worse in the economy is taking its toll on the market as the S&P 500 has fallen -18 percent since early May. The market should also fall further if the economy slips back into recession or if the Europe ignites another financial crisis.

That's the bad news.

The good news is that, in the absence of recession, slower growth may have already been priced into the market. Interest rates are at near historic lows.

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With a 10-year Treasury bond yielding just 2.06 percent and a three-year CD paying 1.26 percent on average and the Fed pledging to keep rates low until 2013, the market should still be a reasonable choice for investors when the dust settles.

Market volatility will likely continue for weeks to come, but it's worth taking a look at companies that can thrive in a slow growth environment.

Typically, defensive companies such as utilities and healthcare continue to earn solid revenues in a tough economy. After all, people still heat their homes and get sick in any economy. But, people also do something else regardless of the state of the economy – drink and smoke. In fact, vice might just be the most defensive industry of all.

Stocks of tobacco companies and brewers vastly outperformed utilities and big pharma for just about every measurable period over the past ten years including the past three tumultuous years. Over the past ten years when the S&P 500 returned an average of just 1.6 percent annually, Morningstar's Tobacco group returned a whopping 20 percent average annual total return and Morningstar's Brewer group returned about the same.

One company worth a look is Phillip Morris International (NYSE: PM). This company was spun off from Altria (NYSE: MO), formerly Phillip Morris, in 2008. The new spin off is the second largest tobacco company in the world next to China National Tobacco. The cigarette giant owns seven of the world's 15 leading brands, including the iconic Marlboro brand, Parliament, Chesterfield and others.

Essentially, this spin off is freed from enormous legal and regulatory burdens and has a sizable presence in fast-growing emerging markets, where sales are growing. Earnings are projected to grow at about 12 percent per year for the next four years. PM pays a solid 3.7 percent yield that should continue to grow as the quarterly dividend has increased 40 percent just since its 2008 spin off.

Another strong vice company is Boston Beer Company (NYSE: SAM). This beer maker has the flagship Sam Adams brand and is the largest producer of craft beer in the United States. Craft beer is defined as any beer that sells less than two million barrels per year. These smaller brands typically have a more rich and unique taste that the public is increasingly going for. In fact, craft beer is the fastest growing alcoholic beverage.

Boston Beer is growing at a feverish clip as net income doubled between 2005 and 2009. The company still has much room to grow as it only had revenues of $464 million in 2010.

Even though the stock returned over 100 percent in 2010 and posted an average annual return of over 20 percent per year for the past one, three, five and ten year periods, its valuation is compelling as well. At 19 time earnings it sells well below it five year average of 30 time and the current industry average of 29 times.

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The country's current trajectory is not good.A sputtering economy with no coherent plan to improve things, huge unfunded liabilities and skyrocketing debt don't inspire much hope for the future.The prognosis seems to be slow growth (if not recession) in the near and...
Monday, 22 August 2011 08:40 AM
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