Fund in Focus: Vice Fund

People continue to smoke, despite the widely known health risks. Tobacco is a cash-rich business, and cigarette companies continue to pay high dividends. Ahrens notes that while the percentage of smokers in the U.S. is declining, the global market for tobacco products is huge and growing.

Ahrens is bullish on R.J. Reynolds Tobacco’s (RJR) recent acquisition of British American Tobacco’s U.S. cigarette business. Both stocks are in the fund.

“British American wants to concentrate on their booming non-U.S. business, primarily Europe, Southeast Asia and Africa” he said. “They don’t like the litigation risks in the U.S. As for RJR, their stock has been foundering for the past couple of years as they continued to lose market share in the U.S. to their main competitor, Altria, as well as to the small discount wholesalers. This deal makes RJR a strong number two tobacco company behind Altria.”

Ahrens remains largely unconcerned about the lawsuits facing American tobacco companies. “There are two things to remember about all this litigation activity,” he noted. “It’s almost entirely confined to the U.S., and tobacco companies have won the vast majority of these suits. With respect to tobacco stocks, we think the risk of litigation has already been priced in.”

Alcohol

Ahrens notes that while the alcohol industry “is not very dynamic, it is an extremely steady grower. It is virtually a recession-proof business.” The brewing industry in the U.S. is expected to benefit from a good pricing environment, improving demographic trends, and rising consumption.

“Anheuser Busch dominates the U.S. beer market,” Ahrens said. “When most people thought they had peaked out a few years ago, they’ve actually increased market share primarily through an excellent marketing campaign. They also have extended their market share outside the U.S. The company’s stock has delivered positive returns every year for the past decade, through all kinds of market turmoil.”

Ahrens also owns the second largest American beer manufacturer, Adolph Coors (RKY). “The stock has been in the doldrums for the past year, but we think it’s a great buy for the long-term” he said. “The stock is significantly undervalued.” Coors currently trades at a modest p/e of about 13.

Defense

While most people would not consider aerospace/defense industry to be sinful, Ahrens invests in this sector because socially-responsible funds screen it out. The ongoing conflicts in Iraq and Afghanistan, along with President Bush’s dedication to increasing the nation’s military budget, ensure a very positive outlook for defense companies.

One of Ahrens’ favorite defense stocks is L-3 Communications, which makes intelligence, surveillance and reconnaissance systems. “They have been growing earnings and revenues consistently for several years,” he said. “They have also made some smart, strategic acquisitions of companies that complement their business very well. The stock is trading at a p/e of only about 18 or 19 — this is amazing. We think it should be priced much higher.”

Ahrens believes defense is the most undervalued sector he invests in. “If you look at Northrup Grumman and Lockheed Martin (LMT), both of which are in the fund, the stocks are very underpriced with tremendous upside.”

Ahrens does not invest in other “sinful” businesses like pornography and guns — but only because there aren’t many large publicly-traded companies that concentrate in these activities. “Even though AOL Time Warner (AOL) offers some pornographic programming, it’s an extremely small part of their overall revenues. They’re a media company.”