Top 4 Halloween Stocks to Watch for Sweet October Gains

As October unfurls, Halloween, commonly recognized as the eeriest time of the year, prompts early discussions on costumes, trick-or-treat, and, most essentially, candy. Beyond the fun and fright, Halloween has become a significant profit-generating venture in the retail sector.

2021 witnessed a considerable resurgence in Halloween sales as the world moved past the pandemic's threats and kindled their long-awaited festivities. Halloween expenditure exceeded the pre-pandemic benchmark, promising a new record high for 2023.

According to the National Retail Federation, Halloween spending could reach approximately $12.2 billion this year, translating to an average of $108.24 per person. This figure is measurably higher than last year's record-setting $10.6 billion or $102.74 per capita.

Research highlights an enhanced interest in Halloween-centric events, with 73% of people indicating plans for celebration, a rise from last year's 69%. Within this group, 68% plan to distribute candies, driving the overall candy expenditure predictions to a staggering $3.6 billion.

However, the Halloween spirit might face a chilling blow this year. Escalated candy costs could potentially burn severe holes in buyers' pockets. The latest Consumer Price Index report unveils candy prices to increase 7.5% year-over-year in September. Inflationary trends have cast shadows on almost every commodity this year, but high candy costs call for heavier blame.

Increasing candy costs are primarily attributed to the global sugar shortfall. Global sugar supply is expected to decline by 10% to 15%, steered by harsh weather conditions. Additionally, soaring cocoa prices, fueled by supply chain hurdles and persisting droughts, present a disheartening picture for ardent chocolate lovers.

Researchers at the sales and marketing group Advantage Solutions surveyed over 1,000 adults. About 40% of those surveyed said inflation will impact their plans to buy candy. However, despite rising costs, many people would be unwilling to hold back on celebrations, as evident from the projected Halloween spending, benefiting the candy companies.

A recent survey conducted by Advantage Solutions amongst a sample of over 1,000 adults revealed that approximately 40% of respondents anticipate a considerable inflationary impact on their candy purchases. Yet, the spirit of Halloween appears indomitable, as consumers are seemingly unwilling to dampen their celebrations, resonating with the foreseen spending predictions. Candy companies would benefit by passing the increased prices to the customers.

Given the landscape of mushrooming Halloween spending in the U.S. and globally, let’s look at some candy stocks: Nestlé S.A. (NSRGY), The Hershey Company (HSY), Tootsie Roll Industries, Inc. (TR), and Rocky Mountain Chocolate Factory, Inc. (RMCF), well-positioned to thrive in the foreseeable future.

Nestlé S.A. (NSRGY)

Based in Vevey, Switzerland, NSRGY, with a staggering market cap surpassing $306 billion, reports its recent majority stake acquisition of Brazilian luxury chocolate manufacturer Grupo CRM. The move was made last month as a strategic step to broaden NSRGY’s portfolio within the premium chocolate niche. Its offering is currently sparse in this sector, apart from the Italian brand Baci.

Initially, the acquisition raised eyebrows due to NSRGY’s concentration on the coffee, pet care, and nutrition sectors, but on further examination, the action holds a clear rationale. NSRGY runs a chocolate enterprise in Brazil, and thus, the amalgamation of production channels could lead to valuable synergies. Additionally, success within the premium chocolate category has been seminal in brands like Lindt.

Over the past five years, its net income and EPS grew at CAGRs of 3.7% and 6.5%, respectively. Its trailing-12-month ROCE, ROTC, and ROTA of 24.01%, 10.18, and 7.35 are 105.5%, 54.8%, and 53.4% higher than the industry average of 11.68%, 6.58%, and 4.79%, respectively.

Net financial debt swelled by 14.7% year-over-year to CHF 55.61 billion ($61.53 billion) for the first half of 2023 (January 2023 - June 2023), while its free cash flow stood at CHF 3.42 billion ($3.79 billion). The increase in debt primarily reflects the dividend payment of CHF 7.8 billion ($8.63 billion) and share buybacks of CHF 2.6 billion ($2.88 billion).

For the fiscal third quarter ending September 2023, analysts expect NSRGY’s revenue to increase 8% year-over-year to $25.33 billion. For the fiscal year ending December 2023, its revenue and EPS are expected to surge 2.8% and 7.6% year-over-year to $104.83 billion and $5.58, respectively.

Rising sugar and cocoa prices may impose increased production costs on NSRGY. The firm has implemented measures to alleviate the expenses by adjusting its product prices.

The company's key strategy pertains to establishing a sustainable supply chain for cocoa to preserve the stability of its supply. For instance, it aims to source 100% of its cocoa through the Nestle Cocoa Plan by 2025. This addresses short-term cost concerns and guarantees the long-term sustainability of their raw materials.

The Hershey Company (HSY)

Chocolate bar and candy-making giant HSY, boasting a market cap of over $38 billion, underscores its global domination by enhancing a rich diversity of universally acclaimed brands. Excelling in the constantly evolving sugar confectionery arena, HSY’s strategically alluring product category capitalizes on the easy accessibility, cost-effectiveness, and irresistible indulgence associated with confectionery treats.

HSY fortifies its influential brand presence through a calculated blend of inventive developments and strategic business acquisitions. This proactive approach targets a heightened adaptation to ever-emerging consumer demands and trends, catering to domestic and international markets.

In this regard, Hershey Canada recently marked a significant milestone, heralding the debut of HERSHEY'S OAT MADE, an innovative plant-based chocolate. This enticing and wholesome option responsibly addresses the escalating interest in plant-based dietary alternatives, bolstering the likelihood of Hershey Canada’s revenue surge and augmenting HSY’s overall business performance.

Over the past three and five years, its net income grew at 18.6% and 11.7% CAGRs, while revenue grew at 10.7% and 7.1% CAGRs over the same periods.

HSY has consistently outperformed expectations in terms of top and bottom-line quarterly returns. Considering the approaching holiday season, commencing from Halloween, HSY could achieve its guidance for the second half of 2023.

For the fiscal third quarter ending September 2023, analysts expect HSY’s revenue and EPS to increase 8.5% and 13.2% year-over-year to $2.96 billion and $2.46, respectively.

In addition, institutional investment decisions tend to wield a profound influence, particularly amongst individual investors. Several institutions have modified their HSY stock holdings. Institutions own the lion's share in HSY, with roughly 78.3% ownership. Of the 1,410 institutional holders, 573 have increased their positions in the stock. Moreover, 87 institutions have taken new positions (2,337,118 shares).

Tootsie Roll Industries, Inc. (TR)

TR, a producer and distributor of confectionery products in the United States, Canada, Mexico, and internationally, has demonstrated significant strides in augmenting company efficiencies, as evidenced by its Return on Total Capital (ROTC) of 7.95%, which is 20.8% higher than the industry average of 6.58% and about a 23% higher than its five-year average of 6.47%.

In the second quarter and first half of 2023, TR witnessed substantial sales growth credited to robust sales strategies and targeted marketing programs, primarily seasonal sales programs. While increased sales prices contributed to this improvement, heightened sales volumes also played a part.

However, a survey by Shiny Smiles Veneers on August 25, 2023, collated responses from 1,002 Americans on their Halloween candy preferences, which may pose challenges for the sweet confectioner. The study revealed that 13.8% of respondents would prefer not to receive Tootsie Roll, 13.9% Nik-n-Lip, and 10.9% Double Bubble. This consumer sentiment could potentially impact TR’s future sales.

Despite making strides toward margin restoration, TR is yet to attain its historical levels. It projects increased ingredient costs in 2024 compared to 2023. Given escalating input costs and the economy's high inflation rate, there would be challenges to achieving the former profit margins anytime soon. TR remains vigilant in managing the mounting costs and further industry price increments, considering the implications and limitations of transferring such costs to its customer base.

Another concern is labor challenges encountered within several of TR's manufacturing facilities, which could jeopardize the company's supply chain efficiency.

On a positive note, TR pays its shareholders a $0.36 per share dividend annually, translating to a 1.16% yield on the current share price. Its four-year dividend yield is 1.03%. The company’s dividend payouts have grown at CAGRs of 2.5% and 2.7% over the past three and five years, respectively.

TR’s five-year average Return on Common Equity (ROCE) was 8.61%, and the five-year average dividend yield stood at 1.05%, so the promising fundamentals may not have yet captured investors' attention. Investors could delve deeper into this stock as additional factors may transform it into a long-term growth prospect.

Rocky Mountain Chocolate Factory, Inc. (RMCF)

International premium confectionary and chocolate franchisor and producer RMCF announced the addition of a franchisee from Missouri Western State University’s respected Center for Franchise Development.

The firm's persistent and assertive adherence to its Strategic Transformation Plan aims to cement RMCF as America's top premium chocolate provider. CEO Rob Sarlls expressed optimism about the company’s prospects, suggesting the initiatives implemented this year would boost revenue in the coming quarters, coinciding with the festive season.

Operational changes have begun showing a positive impact. While reducing its driver fleet by 33%, RMCF has maintained consistent pound volume shipping from its Durango facility, thanks to its logistic optimization.

Furthermore, RMCF has restructured its franchisee royalty and introduced a volume-based discount program. These strategies could encourage high-performing franchisees to expand to multiple locations. RMCF has also tackled issues impeding its e-commerce activity, now outsourcing to reliable third-party services for order fulfillment.

For the fiscal second quarter that ended August 31, 2023, RMCF’s total revenues stood at $6.56 million, consistent with the prior-year quarter. Retail sales and royalties contributed to these steady results. Its net loss from continuing operations was $999 thousand, a significant decline from the previous year's loss of $3.15 million. As of August 31, 2023, its current assets stood at $10.10 million.

Furthermore, RMCF participated in its inaugural investor conference in almost a decade to foster increased transparency and engagement with shareholders and potential investors. This move signifies a renewed commitment to investor relations under new leadership while providing a platform to detail the company’s future strategies.