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Some people prefer to think of the stocks in this article as “sin stocks.” I disagree. I vastly prefer the term “addiction stocks.” Short of buying stocks that are either monopolies or part of oligarchies, where limited competition means big bucks, I love companies that sell products that are addictive. It means the product gets purchased over and over and over again, and that’s great for any company’s bottom line.
My first category used to have a lot more stocks in it than it does today. That’s because private equity went and bought out every other publicly-traded coffee company –probably because they understood the value of addiction!
Fortunately, private equity can’t afford to take Starbucks (NASDAQ: SBUX) private. The company is now worth $70 billion. I have to admit that I never anticipated what Starbucks would become. It was founded on the idea of giving people a location between work and home to meet.
That was a stroke of genius, but making them meet for coffee was even better. Of course, the company has expanded into food and teas, as well. However, it keeps expanding and innovating. It has now launched a coffee delivery service, so you don’t have to go to the store to get your fix. It’s a subscription product that is going to have ultra-high margins.
It remains a great company with some $2 billion on the balance sheet, great free cash flow, a dividend, and still growing earnings at 20% per year. I bought in last year (finally) and added more today.
Bet on Gambling Stocks
You can also roll the dice on gambling, and join others who have invested in gaming stocks of all different varieties. There are many choices in this sector, from horse racing to gambling resorts to online gaming. I have two favorites.
On the gambling side, I have shifted away from Wynn Resorts (NASDAQ: WYNN) which makes for a great trading stock, and am cozying up to Las Vegas Sands (NYSE: LVS). It is more diversified than WYNN, and is 35% off its high thanks to Macau troubles, which are temporary.
Gambling is a winner for investors because every game is skewed towards the house advantage. Over the long term, everyone will lose money, except investors.
However, I am more in love with Amaya Gaming (OTCBB: AMYGF). This is the Canadian company that bought the PokerStars and FullTiltPoker assets, global brand names in the never-shrinking field of online poker. Online poker delivers boatloads of free cash flow. Amaya is going to spend the next few years pushing to legalize online poker state-by-state in the U.S. It will take some time, but the stock will eventually explode.
The Draw of Tobacco
That leaves the granddaddy of addiction for last: tobacco. I don’t need to explain that one to you. Here, you either go with Altria Group (NYSE: MO) or Philip Morris International (NYSE: PM).
PM stock has had its share of recent struggles, but it is back on track again. Free cash flow is just insane, at $8 billion to $9 billion annually, which should tell you just how easy it is to rake in the cash from smokers. They keep smoking, even as taxes on their fix keep rising.
There’s nothing wrong with Altria, and its 3.8% yield, though. It doesn’t have as much debt as its counterpart, not that servicing it at either company is a problem. It also generates tons of free cash flow of $3 billion to $4 billion annually.
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