Sin Stocks Revisited: Resolving the Sin Stock Anomaly

The Journal of Portfolio Management, Vol. 44, Issue 1, Fall 2017 

Various studies report that investing in “sin stocks”—firms that make money from human vices such as alcohol, tobacco, gambling, and weapons—has historically delivered significantly positive abnormal returns. This finding has inspired the hypothesis that sin stocks are shunned to such an extent that they become systematically underpriced, enabling investors who are willing to bear the reputation risk involved with investing in these stocks to earn a return premium. In this article, the authors further investigate this notion, finding that the performance of sin stocks can be fully explained by the two new quality factors in the recently introduced Fama–French five-factor model, profitability and investment. Their finding is robust over time and across different markets. In short, there is no evidence that sin stocks provide a premium for reputation risk after controlling for their exposure to factors in today’s asset pricing models.