Deciding what makes a company a "sin stock" can be highly subjective. For example, consider The Coca-Cola Company.
Some say it is one of the most prestigious brands in the world and a true American success story. Others would argue it is a net negative to humanity thanks to its sugar-laden drinks and their detrimental health impact. Regardless of where you may land on the issue, Coca-Cola has been an unbelievable stock.
Today, three Motley Fool contributors will look at Boston Beer (NYSE: SAM), Red Rock Resorts (NASDAQ: RRR), and Planet 13 Holdings (OTC: PLNH.F) and explain why they could become the next outperforming sin stocks.
The new frontier in beer
Josh Kohn-Lindquist (The Boston Beer Company): While beer companies may be one of the most widely accepted categories of sin stocks out there, investors may not be able to guess this by looking at Boston Beer's share price over the last year.
Since trading above $1,200 in early 2021, shares of brewer Boston Beer have plummeted around 70%. After wildly overestimating how much of its Truly hard seltzer it would sell in 2021, the company had to destroy millions of cases of Truly -- resulting in a $100 million write-off.
The following year, Boston Beer focused on reimagining its hard seltzer offerings, but saw companywide depletions decrease by 7% in the second quarter of 2022. Depletions are a metric used by breweries to track beer that has left the warehouses of Boston Beer's distributors.
So if depletions are still decreasing, why should investors be interested in Boston Beer?
First, excluding Truly's decline, the rest of Boston Beer's offerings posted depletion growth of 14% year over year in Q2 2022. This growth highlights that despite the mismanagement of Truly over the last two years, the company's diversified suite of beer offerings remains strong.
Adding to this diversified approach, the company's new Hard Mountain Dew has already become the top flavored malt beverage in the seven states where it is sold. On top of this, its Truly Vodka Seltzer launch is coming this fall and could provide a new sales channel for Boston Beer to explore.
Best of all for investors, despite the short-term troubles facing Truly currently, it still has the highest household penetration rate of any beer among 21- to 34-year-olds. While the hard seltzer market is still young -- and needs to prove its long-term viability -- this widespread adoption by its younger customers is incredibly encouraging for Boston Beer's long-term ambitions.
Thanks to the stock's wild ride over the last few years, its price-to-sales ratio now sits near its lowest level in a decade.
SAM PS Ratio data by YCharts
Should Boston Beer return to its average 9% profit margin from the last five years, it would trade around 25 times earnings using today's prices. Thanks to this fair valuation and Boston Beer's growth potential stemming from its success with its younger customers, a gradual turnaround could be a great long-term proposition at these prices.
A safe bet on a stock that pays
Bradley Guichard (Red Rock Resorts): Gambling is one "sin" that has seen serious growth in recent years. According to Forbes magazine, gambling revenue in the U.S. reached $53 billion in 2021, which was a whopping 21% over the previous high reached in 2019. The Las Vegas Strip remains far and away the gambling mecca, but the second-largest market in the U.S. may surprise you: Las Vegas locals.
That's right, off-strip gambling in Las Vegas generates more money than any other U.S. market, even New Jersey. Red Rock Resorts operates 16 properties in this market through its namesake and subsidiaries, including the Station and Wildfire casino brands. Red Rock decided strategically to close three underperforming properties after the COVID-19 shutdown, so revenue is down slightly from its 2019 peak; however, net income, earnings per share (EPS), and earnings before interest, taxes, depreciation, and amortization (EBITDA) are all significantly improved. Adjusted EBITDA reached $741.8 million over the last 12 months with a 45% margin -- not bad for a company whose market cap is just over $4 billion. The closures also pave the way for exciting developments.
Red Rock has major plans to build in extremely desirable locations. Its Durango project will be a $750 million casino resort in one of the fastest growing, affluent, and underserved areas of Las Vegas. The property should be complete in late 2023 or early 2024 and will feature all the amenities expected from a Las Vegas Resort.
Other properties have been acquired in areas to the north and south, which sit adjacent to rapid population growth centers in the city. Shareholders should expect development plans shortly as management plans to nearly double the company's portfolio by the end of the decade.
Shareholders will also get rewarded while these plans come together. Red Rock pays a dividend with a forward yield of 2.5% and has $332 million remaining on its current share buyback authorization -- around 8% of the market. All of this makes little-known Red Rock Resorts a sin stock that investors should have on their radar.
A unique player in the cannabis space
Jeff Santoro (Planet 13 Holdings): Planet 13 Holdings is a multi-state cannabis company that operates in Nevada, California, and Florida, with an Illinois location expected to come online in the near future. What's unique about Planet 13 is their focus on superstores. Their flagship store in Nevada is a 24,000-square-foot dispensary located adjacent to the Las Vegas Strip. There is also a superstore in Santa Anna, California, and a series of medical marijuana stores in Florida. In Illinois, the company has secured approval and is currently seeking a location for its next superstore.
This business strategy, which relies more on the walk-in experience, was badly impacted by the pandemic, but has recovered since. In the recently reported second quarter of 2022, Revenue was $28 million. While that was down 14% year over year, that's largely due to the impact of the pandemic. Over the past five years, revenue has grown 480%.
The company also made some improvement on the bottom line in Q2, posting a net loss of $2 million, as compared to a loss of $5.6 million in the year-ago quarter. This was partially due to some efficiencies in the business as operating expenses decreased 20%, and dropped as a percentage of revenue from 59.6% to 55.1%.
Despite these bright spots, the overall business has been hampered by inflation and the related pullback of consumer spending. As travel to locations like Las Vegas and discretionary spending has trailed off, sales at Planet 13 locations have felt the impact.
An investment in Planet 13 needs to be for the long term. The industry trends are clear, and Planet 13's superstore business model presents a way for the company to differentiate itself in a crowded space. To that end, Planet 13 has recently secured approval for a consumption lounge at its Las Vegas location. This provides an opportunity for customers to shop and then enjoy their purchases in an upscale lounge, located just off the Vegas Strip.
The legal cannabis market is expected to grow at a compound annual rate of 15% per year until 2030, reaching $47.5 billion. If Planet 13 is able to use its unique positioning to capture even a fraction of that market, this could be a winning stock to own.
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Bradley Guichard has positions in Red Rock Resorts (Class A) and has the following options: short October 2022 $35 calls on Red Rock Resorts (Class A). Jeff Santoro has no position in any of the stocks mentioned. Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Planet 13 Holdings Inc. The Motley Fool recommends Boston Beer and Red Rock Resorts (Class A) and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
