Does vice pay? It depends on where you look.

Indeed, there’s plenty of evidence which shows that vice or sin stocks outperform the market (more on this later) although a recent study published in The Journal of Law and Financial Management, a publication of The University of Sydney, questions these results.

The study was conducted by Greg Richey, a lecturer of finance at California State University, San Bernardino who, in his own words, was looking to determine, “how the individual vice industries have performed against the market portfolio”.

Abstract:

“This article examines the return characteristics of a portfolio of US ‘vice stocks’, firms that manufacture and sell socially irresponsible products such as alcohol, tobacco, gaming services and national defense. First of all, I construct a portfolio using the daily returns of 41 vice stocks over the period October 2007 to October 2013 and find the Jensen’s alpha (CAPM), Fama-French Three Factor and Carhart Four-Factor results for the entire portfolio, the entire portfolio during bear and bull markets, and each vice industry individually. Full-period results show a positive, yet insignificant alpha for the entire portfolio and each vice industry. Bear market results show a positive and significant alpha for the entire portfolio as well as for all industry portfolios except the tobacco industry. Bull market results for the portfolio are less conclusive with a significant alpha only in the three and four-factor models.”

Source: Richey, Greg M., Can Naughty Be Nice for Investors: A Multi-Factor Examination of Vice Stocks (August 3, 2014). Journal of Law and Financial Management, Vol. 13, No. 1, June 2014, pp. 18-29. Available at SSRN:http://ssrn.com/abstract=2475646

These results conflict with the findings of many other studies, all of which have concluded that vice stocks do outperform by a significant margin over the long-term. It should be noted that Greg Richey’s study only covers six years of performance. Other studies look at returns over several decades of returns.