Monday, January 02, 2012

What Does Warren Buffett have in Common with Vice?

There is a mutual fund called the Vice Fund (VICEX), which invests in what it calls 'vice' oriented company that are in the business of either aerospace and defense, gambling, tobacco and alcoholic beverages. According to the company's web site, the fund says that "these industries tend to thrive regardless of the economy as a whole. In fact, they may have the potential to perform better when times are uncertain, leading many to view investment in 'Vice' industries as a solid strategy during recessionary periods." As of the end of November, the fund was up an amazing 9.62% year-to-date, while the S&P 500 generated a slightly above break-even return of only 1.08% during the same period.

It is interesting to note that many of the stocks in the Vice Fund have high yields, partially due to what I call the 'bad company discount'. Since many institutions and individual investors avoid these types of stocks, the buying arena is smaller than other stocks, causing the discount in price compared to other income stocks. This is especially true with tobacco and cigarette stocks, such as Altria Group Inc. (MO) which yields 5.5%, Lorillard, Inc. (LO) yielding 4.5%, and Philip Morris International, Inc. (PM) at a 3.9% yield, all of which are owned by Vice.

The alcohol stocks have yields but not as high as tobacco. Brown-Forman Corporation (BF-B), producer of Jack Daniel's and Southern Comfort, provides investors with a yield of 1.7%. Anheuser-Busch InBev (BUD), maker of Budweiser, yields 1.6%.

So getting back to the big question, what is the 'vice' stock that Warren Buffett's Berkshire Hathaway (BRK-A) (BRK-B) owns? The stock is General Dynamics Corp. (GD), which makes combat vehicles, weapons systems, munitions, and military ships. The stock trades at nine times forward earnings, and yields 2.8%. The company generated a very slight profit increase of 0.30% for the latest quarter, on a 2% revenue increase.

To see free lists of these stocks, has lists of Beer Stocks, Wine and Liquor Stocks, and Warren Buffett Berkshire Hathaway Stocks, which can be downloaded, sorted, and updated.

Disclosure: Author didn't own any of the above at the time the article was written.


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