Investing in guns, alcohol, tobacco and gambling has paid off over the past year – and should continue to do so over the long haul. By Kathy Kristof, Contributing Editor January 24, 2014 In a world where even the Pope calls himself a sinner, there are profits to be made by peddling temptation. Traditional “sin stocks” – those involving guns, alcohol, tobacco and gambling – have been on a roll over the past year. And vice stocks continue to hold long-term appeal.See Also: This Fund Beats the Market with Faith-Based Rules Of course, sensitive investors might balk at investing in companies that make or market products they find abhorrent. But sin is a relative term. A teetotaler might eschew stocks of liquor companies, for example, while another investor could argue that soft drinks are just as bad for your health. “There is a lot of gray area,” says Patrick Morris, chief executive of Hagin Investment Management, a New York City money manager. Further complicating the case for purveyors of sin is their susceptibility to government restrictions and negative news developments that don’t affect the typical company. The shares of gun makers may plunge in the wake of a mass shooting (or they may surge; see below), while legislation to levy new excise taxes on companies that facilitate “sinful” behavior could tank tobacco, booze and casino stocks. That means investors in these companies have to be prepared for volatility. But volatility can also mean opportunity for intrepid investors willing to buy sin stocks. Advertisement Alcohol The future is bright for booze, says Stifel Nicholas analyst Mark Swartzberg. Not only is the U.S. finally expanding enough to make Americans want to raise a celebratory glass, but foreign economies, especially those of developing markets, are also taking flight, creating bigger middle classes all over the world. And people who reach middle-class status are more likely to imbibe and move up to premium brands. Swartzberg likes two overseas-based alcohol companies in particular. He has buy ratings on Diageo (DEO), maker of Johnnie Walker Scotch, Smirnoff vodka and Tanqueray gin, and on Anheuser Busch InBev (BUD), maker of Budweiser, Stella Artois and Beck’s. Both trade in the U.S. as American depositary receipts. (Share prices are as of January 22.) Swartzberg says London-based Diageo is benefiting as U.S. consumers move from beer to high-end spirits, which command rich profit margins. He thinks the trend will gain steam as economic growth in the U.S. accelerates. Advertisement InBev has been on a buying spree lately, agreeing to buy South Korea’s Oriental Brewery in January for $5.8 billion after buying beer giant Grupo Modelo, maker of the Corona and Pacifico brands, last year. However, to win Justice Department approval of the earlier deal, InBev had to sell off Modelo’s U.S. business. That acquisition and divestiture has muddled earnings comparisons and is likely to present some transitional challenges. But Swartzberg is impressed with InBev’s management, culture and new advertising initiatives aimed at better connecting with the hard-drinking Millennial generation. Despite some short-term tumult, he expects InBev to reward shareholders generously over the next year. D.A. Davidson & Co. analyst Timothy Ramey is a fan of Constellation Brands (STZ), which makes Robert Mondavi and Clos du Bois wines, as well asBlack Velvet Canadian Whisky and Paul Masson Grande Amber Brandy. Constellation was the buyer of Modelo’s U.S. business, which turned the wine and spirits company based in Victor, N.Y., into the U.S.’s third-largest beer brewer (after InBev’s Anheuser-Busch unit and SAB Miller). That has sent sales and earnings soaring and is likely to help Constellation grow profits at a double-digit pace for several years. Gambling Whether you consider gambling a vice or a diverting form of entertainment, it’s spreading throughout the nation, with gaming establishments opening up even in Bible Belt states such as Louisiana and Missouri. In fact, gambling is becoming so common in the U.S. that new casinos have started to cannibalize the customers of old ones, making it tougher for some companies to grow. Advertisement That’s not the case in the Chinese gaming capital of Macau, where just six companies control all the gambling licenses in China. The most attractive stock among these is Melco Crown Entertainment (MPEL), says Bryan Maher, an analyst with Craig-Hallum Capital, a Minneapolis investment banking firm. The Hong Kong company’s profits and revenues are growing briskly; analysts on average see earnings surging 30% this year. The reason? Melco gets all of its profits from Macau, and a fairly new train line from mainland China to the Hong Kong-adjacent peninsula is contributing to booming growth. Macau already brags seven times the gaming revenue of Las Vegas. Moreover, Melco is developing a resort on the nearby island of Cotai that could help address Macau’s hotel room shortage. That might encourage visitors to stay longer and gamble more. Melco is also developing a property in the Philippines. Maher expects these two international gambling centers to fuel Melco’s rapid growth for years to come, and that could justify Melco’s rich stock price. Its ADRs trade at 26 times estimated 2014 earnings. Guns Gun sales are likely to drop this year for a counterintuitive reason: Congress isn’t seriously considering any gun-control measures. After a young man massacred 20 children and six adults in Sandy Hook, Conn., in 2012, a raft of gun-control bills were introduced in an effort to halt the sale of semiautomatic firearms. That sent gun enthusiasts on a “now or never” buying spree that caused gun makers’ profits to soar. But the bills went nowhere. Advertisement Still, Brian Ruttenbur, an analyst with CRT Capital Markets, a Stamford, Conn., investment firm, likes Smith & Wesson (SWHC). The stock is cheap, selling for just 11 times estimated year-ahead earnings. Earnings are growing slowly, but Ruttenbur thinks a rise in the number of states allowing concealed weapons and a hike in gun use among women will eventually revive sales and profits. Tobacco The industry faces plenty of challenges in the U.S., where smoking has been on the decline for decades. The latest government data shows that just 18% of Americans smoke today, compared with nearly 25% in 1995. However, the figures are vastly different overseas, where rising populations in developing countries have led to a 34% increase in the number of daily smokers worldwide since 1980, , according to the Journal of the American Medical Association. In countries such as Russia and Indonesia, more than half of the male population smokes every day. And these smokers are moving up to premium brands, says Morningstar analyst Thomas Mullarkey. That’s been a boon for Philip Morris International (PM), which sells the iconic Marlboro and Chesterfield brands in overseas markets. (Altria sells these brands in the U.S.) Better yet, the New York City company’s stock is cheap, says Mullarkey. It sells for 15 times estimated 2014 earnings and boasts an impressive dividend yield of 4.5%. Mullarkey thinks the stock is worth $93 today. He also likes British American Tobacco (BTI), maker of Lucky Strike, Kent, Dunhill and Pall Mall brands. The company operates in Asia, Eastern and Western Europe, Africa and the Middle East, as well as in the U.S. The ADRs sell for 15 times estimated 2014 earnings and yield 4.0%.