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3 naughty-but-nice shares I want under my Christmas tree for 2020!

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The Christmas and New Year holidays are a time of parties for many, with over-indulgence being key to proceedings – and long may it continue!

People rarely forego their tipples, smokes, or a flutter on the bingo, even during the rest of the year, which is why ‘sin’ stocks can be attractive because of their often defensive and cash-generating credentials.

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Here are three naughty-but-nice shares I want under my Christmas tree this year to hold for 2020 and beyond.

Alcohol

Premium alcoholic drinks producer Diageo  (LSE: DGE) is a giant in the FTSE 100 with a market capitalisation near £72bn. But at 3,000p, the share price is just over 17% below its September high.

And that’s attractive, to me – any weakness in the price always looks like an opportunity for me to buy some of the shares. Such is the confidence I’ve developed over the years in the firm’s ability to keep producing revenue, earnings, and cash flow that can service the rising dividend.

The company’s success has been driven by its powerful brands. Names such as Guinness, Baileys, Captain Morgan, Smirnoff, Johnnie Walker, and Tanqueray. In an update in September, the company said its new trading year started well from the beginning of July. And the firm’s strategy is building on “the momentum and consistent progress” we’ve been seeing from the enterprise.

The shares may have slipped a little but I reckon the business remains strong. Meanwhile, the forward-looking earnings multiple sits just below 20 for the trading year to June 2021.

Smokes

Smoking products supplier British American Tobacco (LSE: BATS) has seen its share price knocked back recently because of regulatory fears related to vaping products and menthol flavoured cigarettes.

I also think part of the valuation adjustment has been due to the unwinding of an over-valuation of the sector that occurred because of the so-called bond-proxy trade, which saw investors piling into defensive shares for their steady dividends over several years.

However, my guess is that the valuation may have over-shot to the downside and we could see upwards progress in the share price through 2020 and beyond. But regardless of valuation, the underlying business continues to thrive, and operational progress could pressure the share price upwards too.

On top of that, shareholders can collect the healthy, growing dividend which is yielding above 7% for 2020. It’s hard for me to ignore that.

Gaming

The story behind bingo, gaming, and gambling operator Rank (LSE: RNK) is that over several years the bricks-and-mortar business had been struggling with sales migrating online. For a long time, the share price slid down because emerging growth from the digital business could not overcome the slippage from the traditional operations to stop overall earnings from declining.

But in August with the full-year results report, the firm posted higher cash flow and raised its dividend. Since then, the share price has responded well and is up more than 45%. The investing community has recognised the new equilibrium in the business and we could be on course to see rising earnings in the years ahead, as the online business continues to grow.

Meanwhile, with the stock at 248p, as I write, the forward-looking earnings multiple sits at just over 11 and the anticipated dividend yield is 3.9%. I think that valuation is attractive given the potential growth on offer.

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Kevin Godbold owns shares in British American Tobacco. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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