Halloween Stocks: Mostly Fright Night

Some companies might seem naturals to benefit from trick-or-treating. Money pro Brent Wilsey thought so -- until he looked closer

By Amey Stone

Halloween has become a major growth industry in the U.S., so hot that it enticed San Diego investment adviser Brent Wilsey to seek out ways to play the trend. National spending on the ghoulish holiday is up to $3.3 billion, a 5.4% increase over 2004, according to National Retail Federation estimates. So Wilsey decided to try to scare up some stock ideas among retailers and candy companies that seemed likely to benefit from the sales gains.

Much to his surprise, Wilsey's Halloween picks turned out to be a pretty scary bunch. Only one, Party City (PCTY ), did he judge a treat for investors. Once he got a look at the numbers, he ran screaming from the likes of Tootsie Roll (TR ), Hershey (HSY ) and Big Lots (BLI ).

"I like to eat candy, but these stocks were just too pricey," Wilsey says. He was less frightened of Wrigley (WWY ), but he deemed it only worth keeping an eye on for now. The following are his five Halloween picks and pans:

Party City -- Buy

Wilsey thinks this costume and party-supplies retailer is worth putting in your goodie bag, but not because of its cheap price or compelling fundamentals (his usual criteria). Instead, he likes it as an arbitrage opportunity. Party City is in the process of being acquired by privately held AAH Holding Corp. at a cash price of $17.50 a share. The stock is trading now for about $16.50.

"If the sale goes through in six months, that equals a 12% annualized return," he says. "If it's purchased in three months, the return goes up to 24%."

If the deal falls through, he thinks the stock would tank since Party City's sales and earnings growth on its own aren't that strong, and the shares were trading for just $12 before the deal was announced. But Wilsey thinks the takeover will go through.

Big Lots -- Sell

Although Big Lots is stocked with Halloween costumes and party supplies on the cheap, this discount retailer is facing tough times. Wilsey notes that costs are rising, earnings are falling, and sales growth is slowing as higher energy prices eat into its customers' disposable income.

"The sale of the kind of knickknacks Big Lots carries did well when the economy was doing well," Wilsey says, but not anymore. The stock has come off its 52-week low of $10 and is now at around $11.50, but Wilsey worries that it could face declines from here.

Hershey -- Sell

"It's too expensive and has too much debt," Wilsey says, explaining why he thinks this treatmaker is more of a trick for investors. At roughly $57.50 a share, Hershey has a price-earnings ratio of 28, far above the p-e of 19 for most food companies. Wilsey says he prefers to pay around 15 times earnings -- currently the p-e of the S&P 500-stock index.

He also wasn't impressed with all the debt on Hershey's books. "I like eating their candy, but for it to be a buy, its stock would have to fall back to $40 or $45," he says.

Tootsie Roll -- Sell

Here's another candymaker that Wilsey believes investors are better off avoiding this Halloween. For starters, at $31 a share its p-e is a hefty 24 -- too high, he says.

"It has a great brand name, but how much higher is that stock going to go?" Wilsey asks. "There are technology companies, like Cisco (CSCO ), with much better earnings growth going forward that are trading at a lower multiple than Tootsie Roll," he observes.

The best time to buy the stock would be if it has a bad Halloween season and the price falls. Tootsie Roll in the $20 to $24 range? That would be treat, he believes.

Wrigley -- Watch

Here's a candy company that Wilsey isn't completely sour on, though he still finds Wrigley too expensive and debt-ridden for his taste. The p-e is 30, and Wrigley just spent $1.48 billion to acquire a bunch of brands like Altoids and LifeSavers from Kraft (KFT ).

But Wilsey is impressed with Wrigley's year-over-year earnings growth of better than 13%. "If its earnings keep growing as the company works through the debt it took to buy the new brands from Kraft, it could be a good buy," he says.

Even though Wilsey rates most of his Halloween-themed stocks a sell, he doesn't believe investors should ever short-sell. Betting that a stock will fall can expose investors to massive losses if it instead spikes higher. "Shorting for me is too risky," he says.

"I think about investing like I am buying a business," says Wilsey. He seeks to preserve his clients' capital by avoiding unnecessary risks -- like paying up for a Halloween play right before Halloween.

Stone is a senior writer for BusinessWeek Online in New York

Before it's here, it's on the Bloomberg Terminal.