Like Taking Candy From a Baby
When I was a kid, Halloween was not the extravaganza it is now. That day, I’d cut a few holes in an old sheet to become a ghost for a few hours and head down the street for some free candy.
That sort of effortless approach doesn’t cut it anymore. Now, Halloween is big business. Last year, Americans spent more than $10 billion on Halloween.
That’s a lot of candy. And with the price of candy jumping 13% over the past year, that could push this year’s total Halloween spend above $11 billion.
Don’t get me wrong. I like Halloween and enjoy seeing kids having so much fun. But with inflation on the rise and families pinching pennies, that extra billion dollars might be better spent elsewhere.
Try telling that to a ten-year-old child with a sweet tooth. For that matter, try telling that to my thirty-year-old daughter who just dropped a couple hundred bucks on THREE Halloween costumes for her dog.
Halloween isn’t just about candy and costumes anymore. Homeowners spend hundreds of dollars festooning their yards with faux graveyards, zombie pirate ships, and giant inflatable pumpkins.
Is it getting out of hand? Maybe, but people are going to spend their money on what makes them happy so there’s no point in having that discussion.
Instead, let’s talk about how to profit from all that money being spent on one day of the year.
According to national food retailer Kroger (NYSE: KR), the top-selling Halloween candies last year (with the name of the manufacturer in parentheses) were:
- Reese’s Peanut Butter Cups (Hershey)
- Snickers (Mars)
- Kit Kat (Hershey)
- Hershey Bar (Hershey)
- Tootsie Roll (Tootsie)
Since Mars is privately held, that leaves The Hershey Company (NYSE: HSY) and Tootsie Roll Industries (NYSE: TR) as the two biggest publicly traded plays on Halloween candy.
At first glance, Hershey appears to be the obvious choice. It makes three of the top five selling Halloween candies.
However, Hershey is much more diversified than Tootsie. It makes a wider variety of sweets, not all of which are nearly as popular as its top sellers.
Also, Hershey is considerably bigger than Tootsie. Its market cap of $45 billion dwarfs Tootsie’s $2.7 billion stock market valuation.
What that all means is that Halloween sales of Hershey’s candies will have less impact on its share price than holiday sales will have on Tootsie.
We won’t know exactly how much of an impact Halloween sales will have on either company until January. Both companies will release their Q3 results in a few weeks, but that is for the three-month period ended September 30.
What we do know is that both stocks have been on a sugar high this year. Through the end of last week, HSY was up 15% year-to-date while TR had gained 9%.
Over the same span, the SPDR S&P 500 ETF Trust (NYSE: SPY) was down 23%. Apparently, whatever Americans are spending less money on in response to rising inflation, it isn’t candy.
Since both stocks appear to be fully valued, I’d be reluctant to buy either one of them right now. Instead, I’d sell a put option on them at a strike price below their current market prices.
That may sound confusing, but it’s actually quite simple. By selling a put option, I am agreeing to buy a stock at a predetermined “strike” price within a specified timeframe.
For example, last week while Tootsie was trading near $38, the put option that expires on March 17 at the $35 strike price could be sold for $2.50.
If TR falls below $35 within the next five months, then I’d have to buy it at that price. That means I’d be paying $3 per share less for it than what it would cost me today.
And if TR does not fall below $35 by the time this option expires, I get to keep the $2.50 premium with no further obligation. That works out to an options yield of 17% on an annualized basis.
Either way, that sounds like a sweet deal to me!
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