Motley Fool Hidden Gems Investing - Horror Movie-nomics

Episode Date: October 13, 2022

Why are there so many horror movies? Because they're so profitable to make. (0:21) Jim Gillies discusses: - Volatility (the good kind!) in the market today - Insider buying being a signal he watches closely - Why he's most interested in TFS Financial Corp. and Medpace Holdings this earnings season (12:50) As horror movie fans get ready for this weekend's release of "Halloween Ends", Ricky Mulvey talks with Catie Peiper about the economics of horror movies. Stocks discussed: TGT, TFSL, MEDP Host: Chris Hill Guests: Jim Gillies, Catie Peiper Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

The 2026 Chevrolet Equinox, awarded the most dependable compact SUV in the U.S. by J.D. Power, is designed for your everyday. And with available all-wheel drive, you can handle your to-do list with total confidence. Start your build at Chevrolet.ca. Details at JDPower.com. Just in time for Halloween, we've got a look at the business of horror movies and just how scary profitable they are. Motley Fool Money starts now. I'm Chris Hill, joining me today from the Great White North, it's Motley Fool senior analyst Jim Gillies. Thanks for being here. Thanks for inviting me. You don't actually have snow on the ground up in Canada though, do you?

Of course not. No, it's 68 degrees yesterday. You like how I translated to Fahrenheit for your American types? I did. I appreciate it. Yes, you're welcome. Never mind the listeners, I appreciate for me. Don't make me do the math of Celsius. Before we get to earnings season, we should talk about the consumer price index numbers that came out this morning. Today is a nice reminder that volatility goes in both directions. A lot of times when the word volatility is thrown around, it is meant to indicate that stocks are going down. There's usually a negative connotation with the word volatility. Today, we're seeing volatility with an upswing, because when the

market opened, Wall Street was digesting the fact that the CPI came in slightly higher than expected, inflation month over month up 0.4%, which is 0.1% higher than expected. And yes, of course, there was some freakout about that. But then we had this reversal. Maybe it's tied to the The notes that came out from the Fed meeting that gave some people hope that interest rate hikes might slow down a little bit in the future. What goes through your mind when you see this type of activity? Because what goes through my mind is, I'm glad I'm someone who focuses on businesses and really doesn't try to spend a lot of energy understanding why volatility happens like

My big regret today is I have a thing where I only buy basically on down days. It's a discipline I adopted a few years ago. I regret not getting my buy orders in this morning. I've been doing a lot of buying over the past three months, but that's a whole other story. Just on that note, the stat of the week, for me personally, was a stat I saw yesterday, which is that 2022 has had more down days in the market than any year for the market since 1974. Which was a pretty crap year, actually. Yes, it was. But I just thought, okay, it's not just that it feels like it's a bad year, it really is a bad year. I believe this is the third-worst three-quarters of a year behind only 2008,

something happened that year, and I believe it was 1931. I might be off on that one. Regardless, I was not alive for it. But 2022 is truly a special year. I penned a column in Hidden Gems Canada a week or two ago where I basically called it 2022, the year in which no one made money and I went through down all the asset classes. And trust me, no one's made money this year. This is a bad year, which is why I think you should be more of a buyer than a seller this year. You should be excited about this. But you asked what goes through my mind when we see things like what happened this morning happen. Truthfully, what goes through my mind is the old Charlie Brown cartoon with Lucy pulling the football away for the last, I don't know, six months or whatever,

as central banks have really geared up with the interest rate hikes and they've promised ever more hikes as far as the eye can see, and people have kind of freaked out. Every time that people start talking, well, maybe the Fed's going to pivot, maybe the Fed's going to stop, maybe inflation will be moderating, then the inflation report shows up, worse than expected, sell everything, panic. And I'm like, why do you keep doing this, Mr. Market? You know she's going to pull the football. Stop paying attention to this. Start looking at what actual businesses, to your point, Chris, what are actual businesses doing? Are things going to be not great for the upcoming earnings season? Maybe. We've got a couple of already reported, Winmark reported

yesterday. I thought it was perfectly acceptable numbers there, frankly, but the stock market kind of looked at it and went, whatever. There will be some earnings misses, especially companies that have variable rate debt, I imagine probably had a worse quarter than they probably thought at the start of the quarter. But by and large, I'm just interested in what the businesses actually post this. What was it? I think the market was up in the pre-market until about 8.30. I think it was up 300 or 400 points on the Dow. The hot inflation report comes out, completely reverses, goes down to minus 250. I think it opened down 400 or 500 points on the Dow. As we speak right now, it's up about 600 points. You said you like volatility, you got it today.

and a lot of it. To get all Shakespeare on you, it's sound and fury signifying nothing, frankly, in the long-term. Chris Hill So, Friday morning, we're going to get some of the big banks reporting earnings, which for me and a lot of other people signifies the start of earnings season in earnest. I'm curious what company you are most curious to hear from and what in particular you're curious to hear from them. I'll just say from my standpoint, it's Target and their inventory levels. I think a lot of people, whether they are shareholders of Target or not, are going to be watching that, but that's the one for me. What about for you? I mean, yours is going to sound

so much smarter than mine will be. You know, it's like, okay, I'm not the world's biggest Target fan mainly because they ... to go back and look at how when they tried to come into Canada, how badly they screwed that up was truly ... if I thought there were intelligent suits in that C-suite, that was dissipated by that complete screw-up. But that's a story for another day. I think if I were in your shoes, I'd be bitter. I would not be a fan of Target. I'm not bitter. I'm just like, you guys run a successful retail chain, right? How can I go in, this is like 10 years ago, I went in to buy my kid some new winter boots. There were three boots, not three types of boots I could pick from, there were three boots. I'm like, why did you go

down this road? Anyway, that's a whole other thing. I am interested in a lot of companies, a lot of occasionally strange companies. I already mentioned Windmark once. banks. You talk about the big banks are reporting, I'm frankly more interested in small banks, because I think there's real opportunity there. Of course, the small banks have all been shredded, which is interesting in a rising rate environment. I think we've had this conversation before, the rates go up a percentage point, all their lending goes up a percentage point, but what they pay you on your deposit account or your CDs or whatever goes up 20 basis points. I'm That's cool, if you own the bank. I could point you to a little company, it's a bank

called TFS Financial, ticker symbol TFSL. They're currently paying a near 9% dividend yield. This is a plain vanilla, and it's not going away, this is a plain vanilla mortgage lender out of Cleveland, Ohio. Who doesn't get excited about plain vanilla, with an adjunct office in Florida. Who's not excited about that, right? It's nudging along its 52-week low and I personally think things will be probably fine there. Another company, I'm a big fan of signaling. Of course, one of the biggest signals that's usually irrelevant, but people follow it, is insider sales. That's the cliché, insiders may sell for many reasons. And so, there's been a lot of insider selling over the past

couple of years, especially from the, shall we say, the exuberantly valued technology area. Kind of irrelevant to me most of the time, but I am a fan of other signals. So, there's a company called MedPace Holdings, it's a contract research organization for basically drug discovery, compound discovery, medical device discovery. They basically run the test for the big pharma companies. Run by a founding CEO, so very foolish story. This is a company that in the first half of 2022 went out and bought 14% of their shares on the open market, 13% or 14%. They basically spent every penny in free cash flow they've made since the end of 2018 buying back their own stock. There's a very clear price level

they feel comfortable buying up to, probably about 18 times cash flow. That was signal No. 1, that was in the first half of 2022. We obviously don't know what they've done in Q3 when they report, I'll look. But the next signal that I found interesting was, if insider selling is often irrelevant, we like to pay attention to insider buying, right? I mean, again, here is the CEO of a company that founded the company 30 years ago, has been CEO since founding the company, remains CEO today, was already the largest shareholder of the company, I think, had about a 19% or 20% stake. In July, they put out a filing that basically said, hey, we're going to buy personally, Dr. August Trendle, the CEO and

founder, and the vehicle that he controls where he holds all of his shares, or most of his shares. At this price, we're going to buy a million shares. What does a million shares mean? Well, okay. When the company has 31 million shares outstanding, and he's already the largest shareholder, buying a million shares, which by the way, he completed in September, to costing himself $155 million. I don't know how much more you need to be hit over the head about the signal coming out of the company is, we think the business is fine. Thank you for the cheap price, we bought back 14% of ourselves, and oh, by the way, the CEO, already the largest shareholder, is going to increase his holdings by 15% to the tune of $155 million. Now, I don't

know about you, Chris, I don't have $155 million lying around that I can go add to my holdings, but I will flat-out state, you don't have to hit me over the head too many times, I assure you. I've been buying alongside MedPace in the last couple of months as these prices have been available. And again, I've recommended the stock a few times. I've owned it before. I followed it for a number of years. So, I felt reasonably comfortable adding. But again, as everybody, as the market is tanking, as people get upset, as they freak out, buy good businesses at good prices. And when literally the people who are closest to it are screaming at you, we think this is a good price. I mean, it's just an added bonus. I'm interested to see what they actually

post this quarter. It's always nice when the signals are clear. Jim Gillies, great talking to you. Thanks so much for being here. Thank you. This weekend, Halloween Ends will be released in theaters. The franchise includes more than a dozen films, and maybe you've wondered, why do they keep making them? Isn't Michael Myers dead at this point? One reason is that the Halloween movie franchise has grossed over $0.5 billion worldwide. Ricky Mulvey talked with Katie Piper about the economics of horror movies and why they're holding up at the box office. We're well into spooky season, but we got to talk about the money part of this. Katie, why do horror flicks often have

the best return on investment compared to other types of movies going to theaters? Great question. And honestly, some of it goes back to just even the history of the horror industry in U.S. production. They were always the lowest budget films that had the most affordable cast. You were usually using people who were no names or up and comers or stars kind of on their descent, downwardly mobile from the A and B lists. And that tradition has actually become sort of one of the markers of a lot of horror films today. People expect to see faces that they wouldn't normally see or faces that they haven't seen in a while in a horror film. So it keeps the cost down when you don't have to pay the talent quite so much. Additionally, they're not having to license

a lot of expensive IP. This is not Marvel. This is not Harry Potter or Lord of the Rings where you have to pay a lot. And the effects, if they're saving money on their cast, they can pour their money into the effects, but they don't always have to go big and bold. They can rely on practical effects or very strategic uses of CGI. So, overall, they're just a cheaper production to make. I hope we get more practical effects. It's kind of the strategy of Quentin Tarantino in the 90s. Yes, exactly. Yeah. Movie studios often worry about how their films are going to translate around the world. And that's particularly true with horror movies, where the different regulations and different

expectations of what's allowed to be on screen affects what these studios put out. Yeah, absolutely. It's so interesting because when I talk with my film colleagues who focus on international production, they're always talking about how in Europe, the ratings guidelines usually focus more on how violent and gory is it, and they care a lot less about sex on screen, whereas in America, it's very much the opposite. it. So, you're frequently less likely to see a horror film that focuses on just brutal gore left and right. You're not going to see a purge coming out of Europe. But you might see something that's much more psychologically creepy, like the Swedish Let the Right One In. Or on the flip side, you have political cultural regulations, like in China, where ghosts are not allowed to be shown on screen because it's seen as a religious gesture. But they offshore the production and have been for decades in Chinese cultural centers like Hong Kong and Taiwan, where the reach of the

government historically, although it's been changing recently, hasn't infiltrated the film industry quite as much. And then I guess what I would follow up to that is just to say that there's this constant flow back and forth internationally around all of that. As U.S. consumers, we are very used to kind of importing those films, although we may not have the full cultural context for some of the stories that are in them. And so some of the most viral horror films of the last two decades, like Babadook, Train to Busan, you know, these are ones that are coming from Sweden, Korea, Devil's Backbone, you know, early Del Toro from Mexico. So international import of horror films into the U.S. is really important. And then there's the

flip side of Americans trying to remake popular international films, particularly Japanese films like The Grudge and The Ring. So, that conversation is really important. To your earlier point, did you ever see the Vince Vaughn movie, Freaky? Yes. Where it's just, that to me is just one of those, like, the goriest of gory movies. And I didn't particularly enjoy it because of that. And that's one where I would assume Europe would have some problems with that movie. Yeah. Yeah. Or ratings. I mean, I would say all of this is moving to a more China-accepted, because there's a lot of government

policies at play there recently, but in general, we're moving to a much more mainstream mainlined consumption where a lot of these cultural aesthetics that have been created by the industry regulations are converging. But yes, absolutely. I think there's also in the horror community, a really big interest in like, is this a domestic horror film? And therefore I know what kind of genre attributes to look for versus like, is this an East Asian horror film or European Asian horror film? Because then I'm going to know there are other genre elements at play. You've got your Marvels, you've got your James Bonds that do particularly well at the box office, but horror movies are also in that category. Why do you think the horror movies, even in this era

where everybody's streaming everything and you're competing against your TV and your iPad, why have horror movies held up well at the box office? There's so many reasons for it. I think the first is just it's a transactional relationship. I know what I'm getting when I go to a theater and I pay for a horror movie admission. I'm paying to get a good scare. So in that way, it's a lot more certain than if you sign up to go watch a prestige film or an Oscar bait film and you're like, am I going to enjoy this? I don't know. Is this an eat my vegetables film? Quite possibly. So I think particularly when times are difficult, and we see this frequently during recessions or political uncertainty in the world, the genres of films like

horror films, where it's a steady transactional relationship for the consumer, actually fare a lot better. And then specifically with horror, there are certain jump scares, certain elements of things that'll be on screen, the suspense, the impact of the music that you're not going to get on a home screen or your phone screen. And so, I think even during the pandemic, people were much more willing to mask up earlier on and go to a theater because they just wanted that good jump, that good scare that they just weren't going to get at home. I think you could make a similar argument, though, for comedies, right? There's a huge difference between watching a good comedy movie in a movie theater or, let's say, outside at a

drive-in. But it doesn't seem like that logic holds up for comedies as it does for horror movies. That's a really interesting point, because I think this is where you have to really think about what is the cinematic experience of it. And we're so used to consuming comedy on television, The Office, Parks and Rec. We are so used to small-screen comedy now, and it doesn't rely on, you know, the sound systems, the widescreen, the dark room. It does rely on consuming communally, but we've been able to do that. We've been able to move comedy community watching to our homes. We watch with our family, we get online and we talk with our friends. So we're able to replicate some of that community at home. You're not going to be able to replicate a theater

anywhere else except the theater, no matter how great your home sound system is. Yeah. So, as we're getting towards spooky season, no, we're already in spooky season, do you have any favorite horror movies for spooky season coming up on Halloween? Well, one that I have to admit I actually personally have not watched yet, but is on my list for this weekend to go see is Smile. So, it's had an incredible viral marketing campaign that also, if I put on my other hat away from film as a creative marketer, I deeply appreciate. There's something incredibly uncanny about the images that they are using in their marketing campaign. The way the woman in most of the marketing materials smiles, that very creepy

grimace, and it looks directly at you. That's something that the director actually said he cared about really mastering a lot. From a marketing perspective, direct eye contact in ads is always very productive. It works really well in marketing. When I saw them start to do it with this film campaign, I was like, wow, someone knows their marketing. It just interrupts your daily life. You're scanning through, and then suddenly you see the grin of a predatory animal staring right back at you. It's going to jump you out of your everyday context and slip you into that uncanny valley. Out of appreciation for their marketing campaign, I'm going to go see that this weekend. Go check out Smile. Yeah. And they were also able to save on marketing costs

by just having actors do the creepy smile at baseball games and sporting events where they're in the camera. Yes, absolutely. Which I also appreciate, again, in the history of marketing. Horror Film was the first viral marketing campaign, the Blair Witch Project, to ever start. So there's a long tradition of trying to find these fun moments of viral marketing in the genre. Katie Piper, thank you for your time. It's always a pleasure. Thank you. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based

solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow. Thank you.