‘Bad’ Stocks Outperform for Good Reasons

The stock market has a nasty habit of turning sure things into sure losers. Consider Nike Inc. In a recent commentary, my Bloomberg Opinion colleague Barry Ritholtz explained how many failed to understand the opportunity presented by the sneaker and sports-apparel maker’s signing of controversial former National Football League quarterback Colin Kaepernick to a marketing deal. Many expected Nike’s shares to suffer amid political backlash, but they didn’t.

I’d like to expand on Ritholtz’s excellent insights by first taking a look at the practice of socially responsible investing, which everyone knows hasn’t worked out well. A socially responsible investor generally avoids certain companies that are perceived to engage in antisocial behavior, such as tobacco or firearm companies. The theory is that companies that seek to do good and have good governance practices will be rewarded by the stock market. But, broadly speaking, that hasn’t been true. Tobacco stocks have outperformed the S&P 500 Index for years on a total return basis. Some have figured this out and invest exclusively in these “vice” stocks.