5 Picks Prove the Moral High Road Does Not Lead to Investment Success

The figures are in, and vice beats nice. Look no further than this comparison between The Vice Fund [VICEX] and The Timothy Plan Conservative Growth Fund [TCGAX], which claims to be “America’s first pro-life, pro-family, biblically-based mutual fund group.”

The Conservative Growth Fund is only one of the funds in the Timothy Plan, but the others fared no better. Apparently the moral high road does not lead to investment success.

Investors looking to take the opposite tact have several options in microcap stocks:

New Frontier Media: (NOOF) With a 10% dividend and institutional support, New Frontier may be the most intriguing sin stock out there. Steel Partners and James Simons’ Renaissance Technologies each took large stakes in the company, which distributes porn adult films via pay TV and also has a fledgling internet operation. New Frontier is profitable, earning $.09 last quarter.

The downside? New Frontier lacks both technical and fundamental momentum. Its stock is trading near a 52-week low and earnings are down year-over-year. Of course, its a lot easier to wait for a turnaround if you are getting paid a 10% dividend.

Private Media Group: (PRVT) Private Media produces and distributes adult films, magazines, and digital media. Like New Frontier, Private Media Group is profitable. Last quarter, it earned 0.5 million euros on revenues of 7.5 million euros — respectable numbers, but not especially attractive for an 85 million dollar company.

If Private Media is to unlock value, it will have to find a way to increasingly monetize its huge catalog. According to Private, the future is in IPTV (internet protocol television), internet and mobile. The company has invested heavily in these businesses, but so far has only garnered meager returns.

Rick’s Cabaret: (RICK) The name may be straight out of Casablanca, but this is a far cry from the gin joint Bogart made famous. Rick’s operates a chain of “upscale gentlemen’s clubs,” and all those lap dances have paid off. Over the past four years, shares have rocketed from a little above $1 to over $20. The consumer may be pulling back, but not here. Rick’s sales are up 57% year-over-year. While the company may appear pricey relative to trailing earnings, Rick’s expects to earn $2 per share next year on the strength of recent and planned acquisitions.

VCG Holdings: (VCGH) A reader who is in the industry (on the business side, sorry to disappoint) suggested that VCG could be the next Rick’s. While the stock was on my watch list for years, I had long been skeptical of the related party transactions. Many of VCG’s clubs and operating contracts have been purchased from majority owner Troy Lowrie. The few deals I have examined do not appear particularly egregious, but the close dealing still warrants a certain level of caution. VCG expects to earn $.86-$.92 in 2008 and $1.15-$1.25 in 2009.

Playboy Holdings (PLA): No discussion of adult stocks would be complete without mention of Playboy. I expected it would be a much larger company, but it turns out that PLA only sports a $271 million market capitalization. Profits rose last quarter on increased licensing revenues, but the stock trades near its 52-week lows. The magazine may be in permanent decline, but the brand, 25-years of pictures and videos, pay-TV and internet businesses all have some value.

Please note that we are not advocating purchases in any of the above named securities, we are just noting that over the most recend time periods...there has been no advantage to taking the moral high ground when it comes to investing.