Between February 2009 and February 2010, RICK grew from about $3 to about $15.  RICK is the stock symbol for Rick’s Cabaret International, a chain of “gentlemen’s clubs” (an expression which sounds like the ultimate irony, but that’s not my point today).

Between May 2009 and April 2010, LZB grew from about $2 to about $13. LZB is the stock symbol for the ultimate reclining-chair maker, La-Z-Boy.

Both stocks are considered as “vice stocks.”  Vice stocks are kind of the opposite of virtuous stocks, which are favored by the concept of “Socially Responsible Investing (SRI).”

One of the reasons vice stocks fare so well is that people don’t suddenly quit their bad habits during a recession, - on the opposite.  People want to forget bad times and tend to drink and/or smoke and/or gamble more.  In fact, a Merrill Lynch study shows that alcohol, tobacco and casino stocks have greatly outperformed the market throughout all past recessions.

Two studies, one from Yale and one from Princeton, show that vice stocks outperformed virtuous stocks in 35 out of 37 years.  One of the reasons found is that many of the businesses involved benefit from high barriers to entry, because of high taxes and strict regulations.

So what are vice stocks?

They are recession-resistant stocks that often perform extremely well, partially because of the constancy of human vice.  One financial newsletter recommends (or has recommended) such securities in what they call their “Seven Deadly Sins Portfolio,” which includes:

• Gluttony, with stocks like Diageo, the world’s largest spirit maker, based in London.

• Greed, with stocks like Goldman Sacks (the investment bank) and Wynn (the casinos).

• Sloth, with stocks like La-Z-Boy, DirecTV and video games companies.

• Pride, with stocks like tobacco giant Philip Morris.

• Envy, with stocks like Tiffany’s and Blue Nile.

• Anger, with stocks like gun-maker Smith and Wesson.

• Lust, with stocks like Playboy and Rick’s Cabaret Intl.

Meanwhile, SRI favors companies that make a profit while making a positive contribution to society.  They must respect certain concepts such as:

• corporate responsibility

• societal concerns

• respect for the environment.

• good employer-employee relationships

• safe and useful products

• respect for human rights – and world-wide.

• On the opposite, SRI shuns companies:

• whose business practices and products are harmful to individuals, the environment and/or communities

• allow unreasonable executive pay

• contribute to pollution and climate changes

• have questionable labor practices

• allow gender and/or racial discrimination.

So which ones are better, vice stocks or virtuous stocks?  Instead of a black and white answer, here are a few questions:

• If you invest in a timberland company (i.e. that grows trees), like Rayonier or Plum Creek Timber, does that make you a virtuous investor?  Did you ever wonder how cigarette packaging is made?  Or what Playboy is printed on?

• If you invest in Ford or Toyota, which make cars that cause pollution, does that make you a bad person?

• If you invest in a bank, the epiphany of greed, does that make you a greedy person?  How would you buy a car, a house or a veterinary clinic without a bank?

• If you refuse to invest in La-Z-Boy but buy their furniture, or in a video game company but use their games, or in Smith and Wesson but own a gun, does that make your behavior irrational?

• If you invest in a mutual fund, directly or through a 401 (k), are you certain that you don’t own a few vice stock shares?

What I am trying to say is that it must be really, really tough to find companies and executives that are totally irreproachable, or companies that are truly 100% “socially responsible.”

The Forum for Sustainable and Responsible Investing (www.ussif.org) claims that “a growing number of academic studies have demonstrated that SRI mutual funds perform competitively with non-SRI funds over time.”

That may be true, but vice stocks investors claim to outperformed virtuous stocks, so we’re not comparing apples to apples here.

So what’s an investor to do?  Ultimately, only you can decide what you feel comfortable investing in. 

Investing in vice stocks does not mean investing in lying, steeling or cheating.  These are perfectly legal and sometimes highly controlled companies (whether or not you and I like their products is a whole different subject), who employ many respectable employees who need to make a living, pay their rent and raise kids.  If you make money in vice stocks and put your kids through school or improve your odds of retiring one day, is that such a bad thing?

Phil Zeltzman

Dr. Phil Zeltzman is a mobile, board-certified surgeon near Allentown, PA. His website is www.DrPhilZeltzman.com.  He is the co-author of “Walk a Hound, Lose a Pound: How You and Your Dog Can Lose Weight, Stay Fit, and Have Fun Together (www.walkahound.com).”

* Of course neither the author nor ImproMed endorses any of the securities mentioned.  In addition, you may have heard that past performance is not a guarantee of future results.  Finally, the author would like to reassure his faithful readership: he doesn’t indulge in any of the vices mentioned above.