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Wicked investments

As I write this, stock markets are plunging and you can't open the newspaper without reading another prediction of Depression ahead. Serious issues, no doubt - but no matter what happens next, I'm confident that people will continue to smoke, drink and gamble.

In keeping with that philosophy, I thought it would be interesting to select a handful of stocks that cater to humanity's worse instincts. 'Sin stocks' like these are often excellent investments, particularly in bad times, because they tend to benefit from steady customers, no matter which way the economy is headed.

What constitutes a sin stock? The answer is very much in the eye of the beholder. Tobacco, gambling and defence companies are routinely condemned by the socially responsible crowd. You might want to add various Wall-Street financial firms to the list of the damned given their recent antics.

I used the seven deadly sins as my guide to naughty behaviour and I selected one stock per sin. Just to be clear, I'm not saying that the stock itself is sinful, nor do I think that these firms or their employees are destined for the fiery pit. My intent was to pick companies that provide products or services that may aid others with their sinning. When given the choice between similar sin stocks in the same industry, I stuck to larger firms, with relatively little debt, that trade at modest price-to-earnings ratios. Call it value investing for the damned.

All joking aside, I think that these stocks do deserve your attention. Sin stocks often trade at a premium because they tend to be outstanding businesses. They are now selling at bargain levels. That doesn't happen often. Most of the stocks I selected can be considered large value stocks and most are also big dividend payers. Both those types of stocks tend to do better than average during market downturns.

Let's kick things off with the sin of wrath - or, as we say these days, the military-industrial complex. In this category I nominate Goodrich (NYSE:GR $44.33) of North Carolina. It provides aerospace components and services to the defence and homeland security markets, among other customers. The company trades at a price-to-earnings ratio of 9.4 and it pays a dividend yield of 2%.

I hear that greed is good on Wall Street, but I'll go with gambling stocks for this deadly sin. Here I pick Boyd Gaming (NYSE: BYD, $9.84) despite its decision to temporarily halt construction on a new $4.8-billion Las Vegas casino complex because of tight credit conditions. Boyd remains profitable and has boosted its share repurchase program. It should fare well when the good times return.

Gluttony happens to be one of my favourite sins, but instead of food and drink I'll focus on cigarettes. Cancer sticks are both deadly and consumed with relish by far too many. My puff of choice at the moment is Reynolds American (NYSE:RAI, $50.22), which has a price-to-earnings ratio of only 9.7 and a dividend yield of 6.7%. Smoke 'em if you got 'em.

Lust is also a mighty addictive sin. When it comes to lusty stocks, Playboy (NYSE:PLA, $3.90) always gets a mention, but I confess that the firm leaves me a bit limp. I don't see how the company can overcome the competitive threat posed by free Internet porn. Instead, I like Pfizer (NYSE:PFE, $18.64). Its blue Viagra pills have brought a new urgency to romantic relationships. The drug maker's 6.9% dividend yield and $26 billion cash hoard are also reason for arousal.

After a bit of lust and gluttony, I enjoy a bit of sloth. I'm thinking of a nice Sunday morning spent reading the paper. Newspapers themselves have been accused of being slow to react to the Internet, but one of the few with a good online presence is the New York Times (NYSE: NYT, $14.89). It also happens to be an interesting contrarian play and pays a dividend yield of 6.2% to investors who want to do nothing more than sit around.

Newspaper magnates tend to be a little envious of the boob tube, so let's make TV our symbol of envy, if for no other reason than its ability to inspire envy in millions of viewers. When it comes to TV stocks, I like CBS Corp. (NYSE: CBS, $15.24), which trades at a price-to-earnings ratio of 8.1 and pays a 7.1% dividend yield.

Last but certainly not least is the sin of pride. Indeed, I hear that pride is the original and most serious of sins. I've also been told that pride goeth before a fall. So, it seems appropriate to select a stock to short.

Shorting a stock involves borrowing it, selling it, waiting, and then hopefully buying it back at a lower price. If you short a stock, you're betting that its price will fall. It is a complicated procedure that should be avoided by most investors because of the risks involved. By suggesting a short candidate, yours truly might be the one who's in for a fall.

Nonetheless, I'm going to suggest Royal Bank of Canada (TSX:RY, $51.50) as a potential short based on its current high price to book value. You can't actually short Royal at the moment because of a short-selling ban imposed by regulators who are worried about the slide in financial stocks. So call this a short-on-paper suggestion - in other words, a warning to be wary. Keep in mind that Royal is a fine firm, run by good people, and it is very likely to survive the current downturn. Its stock just happens to be a little expensive compared to historical levels.

I hope that you've been tempted by a sin stock or two. But make sure that any stock is right for you by investigating it more thoroughly before investing. And let me make one final suggestion. If you happen to profit from these sin stocks, give a portion of your profit to charity. That's the most effective way I know to turn vice into virtue.

Last but certainly not least is the sin of pride. I've been told that pride goeth before a fall. So, it seems appropriate to select a stock to short. Shorting a stock involves borrowing it, selling it, waiting, and then hopefully buying it back at a lower price. If you short a stock, you're betting that its price will fall. It is a complicated procedure that should be avoided by most investors. By suggesting a short candidate, yours truly might be the one who's in for a fall.

Nonetheless, I'm going to suggest Royal Bank of Canada (TSX:RY, $45.13) as a potential short based on its high price-to-book value. You can't actually short Royal at the moment because of a short-selling ban imposed by regulators who are worried about the slide in financial stocks. So call this a short-on-paper suggestion - in other words, a warning to be wary. Keep in mind that Royal is a fine firm. Its stock just happens to be a little expensive compared to historical levels.

I hope that you've been tempted by a sin stock or two. But make sure that any stock is right for you by investigating it more thoroughly before investing. And let me make one final suggestion. If you happen to profit from these sin stocks, give a portion to charity. That's the most effective way I know to turn vice into virtue.

* Stock prices as of Oct. 7, 2008

From the November 2008 issue of MoneySense magazine

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