Wall Street Gets a Bad Case of the Munchies

In addition to the obvious beneficiaries, the coronavirus pandemic has created an unexpected set of stock market winners. Recently, I discussed how the recreational vehicle industry has seen sales boom this year. People want to travel but aren’t yet comfortable getting back on airplanes.

You can add the snack food industry to the list of unlikely winners. Three months after the outbreak of COVID-19, sales of cookie variety packs spiked 20% versus last year. I guess all those school-aged kids need a reward for getting their homework done.

Sales of salty snacks such as potato chips and pretzels are up nearly 15%, outpacing cheese snacks (11.5%), popcorn (9.5%), and pita chips (6.1%). It would appear that demand for snack foods is inversely proportionate to their nutritional values.

That may explain why Utz Quality Foods decided to go public this week. To rush this deal through, the company merged with a special purpose acquisition corporation (SPAC), Collier Creek Holdings to form Utz Brands (NYSE: UTZ).

That way, Utz can close the deal much faster than going the traditional initial public offering (IPO) route. By the time that process had been completed the window of opportunity may have slammed shut.

If that doesn’t scream market top, nothing does. Utz was founded 99 years ago and was perfectly happy being a privately held company until now. Stock market valuations are absurdly high, and any business with a coronavirus connection is in high demand.

Of course, the company claims it had been contemplating going public for several years and the timing of it just happened to work out in its favor. If you believe that, I have a bridge in Brooklyn I’d like to sell to you.

Pretzel Logic

Based on the stock market’s reception to this deal, it appears Wall Street can’t get enough of Utz. Collier Creek went public two years ago at $10. On August 28, the day before the merger was announced, Collier Creek closed at $16.34. On August 31, the day this deal was consummated, the stock traded above $19 before closing at $18.40.

Don’t get me wrong. I am an occasional consumer of Utz products and have nothing against the company. However, I can’t help but wonder if the love affair with its stock will continue after the coronavirus pandemic has been tamed. If anything, logic suggests that snack food producers should be unpopular right now.

That’s because obesity is one of the conditions most highly correlated to negative outcomes from COVID-19 infection. The success of the Utz deal underscores the current level of cognitive dissonance caused by the pandemic. We stay home to avoid catching the virus. However, while there we engage in behaviors that increase our risk of falling prey to it, such as overindulging in snack foods.

In the short run, the stock market is anything but logical. Last week, shares of Tesla (NSDQ: TSLA) jumped more than 12% after the stock split 5 for 1. A stock split does not add any financial value whatsoever, but psychologically it makes the stock seem a lot cheaper.

When the coronavirus pandemic is eventually tamed, that may be bad news for Utz. All those kids will be back in school eating cafeteria lunches and their parents will be back in the office without constant access to the home pantry.

That’s why Utz decided to do this deal now. Its founders’ descendants still own more than half of its outstanding shares and decided now was the time to finally cash in.

Cold Draft

Stories like this rarely have a happy ending. Usually, the company enjoys a brief period of euphoria before reality sets in.

Consider the case of online gambling site Draft Kings (NSDQ: DKNG), which also went public via a SPAC reverse merger earlier this year. In the weeks following that deal, its share price more than doubled. All those people stuck at home needed something to do for amusement. Apparently, betting on soccer games was one way to do it.

After peaking above $43 in late June, DKNG quickly reversed direction and fell below $33 just three weeks later. I predicted that would happen and recommended a trade that would have paid off handsomely.

Now, I’m recommending a new trade that I feel has the potential to pay off to the tune of better than 2,000% if you get in soon. And unlike Utz and Draft Kings, this company provides a product that will remain in demand long after the coronavirus pandemic is over.

I’ve just written a special report about this company that explains why I believe it is about to take off. Click here for details.