Horror Movies Are Scary Profitable

In this podcast, Motley Fool senior analyst Jim Gillies discusses topics including:

• Volatility (the good kind!) in the market today.
• Insider buying being a signal he watches closely.
• Why he’s most interested in TFS Financial and Medpace Holdings this earnings season.

As horror movie fans get excited for the release of Halloween Ends, Motley Fool producer Ricky Mulvey talks with Catie Peiper, a member of The Motley Fool team, about the economics of horror movies.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 13, 2022.

Chris Hill: Just in time for Halloween, we’ve got to 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, and that’s Jim Gillies. Thanks for being here.

Jim Gillies: Thanks for inviting me.

Chris Hill: You don’t actually have snow on the ground up in Canada though.

Jim Gillies: Of course, not. No. Sixty-eight degrees yesterday. You like how I translated to Fahrenheit for you American types.

Chris Hill: I did. I appreciate it.

Jim Gillies: You’re welcome.

Chris Hill: Never mind the listeners. I appreciate it 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 percent, which is 0.1 percent higher than expected.

Yes, of course, there were some freak out about that, but then we had this reversal. Maybe it’s tied to 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 this.

Jim Gillies: 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.

Chris Hill: Just on that note, that is the stat of the week for me personally. It 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.

Jim Gillies: Yes, was a pretty crap year, actually.

Chris Hill: Yes, it was, but I just thought it’s not just that it feels like it’s a bad year. It really is a bad year.

Jim Gillies: I believe this is the third worst three-quarters of the year behind only 2008. Something happened that year. 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 tend to call them in hidden terms, Canada a week or two ago, where I basically called 2022, the year in which no one made money, and I went through down all the asset classes. 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 a 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 evermore hikes as far as the eye can see, and people have freaked out.

Every time that people start talking, well, maybe the Fed is going to pivot, maybe the Fed is going to stop, maybe inflation will be moderating, then the inflation report shows up worse than expected. Sell everything, panic. 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 business is. To your point, Chris, what are actual businesses doing? Are things going to be not great for the upcoming earning season? Maybe. We’ve got a couple of already reported. Winmark reported yesterday. Thought it was perfectly acceptable numbers there frankly, but the stock market looked at it and went, whatever.

There will be some earnings misses. Especially companies that have variable rate debt, I imagine probably had a worst 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. 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. It’s the old trick to get all Shakespeare on you. It’s fun and fury signifying nothing, frankly, in the long term.

Chris Hill: Friday morning we’re going to get some of the big banks reporting earnings, which for me and a lot of other people’s signifies the start of earning 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?

Jim Gillies: Yours is going to sound so much smarter than mine will be. I’m not the world’s biggest Target fan mainly because to go back and look at how when they tried to come into Canada, how badly they screwed that up, 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.

Chris Hill: I think if I were in your shoes, I’d be bitter. I would not be afraid to Target. I get that.

Jim Gillies: I’m not bitter. You guys run a successful retail chain. This is 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 he 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 Winmark once. You talked about the big banks 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 when, 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 like, that’s cool. If you own the bank. I could point you a little company. It’s a bank called TFS Financial, ticker symbol TFSL. They’re currently paying a near nine percent dividend yield and it’s not going away. This is a plain vanilla mortgage lender out of Cleveland, Ohio with an adjunct office and Florida. Who’s not excited about that? It’s nudging along its 52-week low and I personally think things will be probably fine there. 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 a cliche. Insiders may sell for many reasons. There’s been a lot of insider selling over the past couple of years, especially from, shall we say, the exuberantly valued technology area. Irrelevant to me most of the time, but I am a fan of other signals. 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 tests where the big pharma companies run by founding CEO, sounds very foolish story. This is a company that, in the first half of 2022, went out and bought 14 percent of their shares on the open market, 13 or 14 percent. They basically spent every penny and free cash flow they’ve made since the end of 2018 buying back their own stock, and there’s a very clear price level. They feel comfortable buying up to probably about 18 times cash flow. That was signal number one, 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’s selling is often irrelevant, we like to pay attention to insider buying.

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 19 or 20 percent stake. In July, they put out a filing that basically said, we’re going to buy personally. Dr. August Troendle, the CEO and Founder, and the vehicle that he controls where he holds all his shares or most of his shares, at this price, we’re going to buy a million shares, which what does a million shares mean? Well, when the company has 31 million shares outstanding and he’s already the largest shareholder, buying one million shares, which by the way, he completed in September to the 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 percent of ourselves. By the way, the CEO already the largest shareholder, is going to increase his holdings by 15 percent to the tune of 155 million. I don’t 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. Again, I’ve recommend the stock a few times. I’ve owned it before, I followed it for a number of years, so I felt reasonably comfortable adding it. But again, as everybody, as the market is tanking, as people get upset, as they freak out, buy good businesses at good prices. When literally the people who are closest to it, are screaming at you, we think this is a good price It just takes us about it. But that’s where I’m interested to see what they actually pose this quarter.

Chris Hill: It’s always nice when the signals are clear. Jim Gillies, great talking to you. Thanks so much for being here.

Jim Gillies: Thank you. 

Chris Hill: This weekend. Halloween Ends will be released in theaters. The franchise includes more than a dozen films and maybe you’ve wondered, why did they keep making them. Isn’t Michael Myers dead at this point? One reason is that the Halloween movie franchise has grossed over half $1 billion worldwide. Ricky Mulvey talked with Catie Peiper about the economics of horror movies, why they’re holding up at the box office. 

Ricky Mulvey: 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?

Catie Peiper: Great question. Honestly, some of it goes back to just even the history of the horror industry in US production, they were always the lowest-budget films that had the most affordable cast. You are usually using people who were no names are up-and-comers or stars on their decent downward lead mobile from the A and B lists. That tradition has actually becomes 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 at a horror film. 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 the rings where you have to pay a lot. The effects, if they’re saving money on their cash, 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’s. Overall there just a cheaper production to make.

Ricky Mulvey: I hope we get more practical effects. It’s strategy of Quentin Tarantino in the ’90s?

Catie Peiper: Yes, exactly. 

Ricky Mulvey: Movie studios often worry about how their films are going to translate around the world. 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.

Catie Peiper: 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 as it, and they care a lot less about sex on-screen, whereas in America it’s very much the opposite. 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. Then I guess what I would follow up to that is just to say that there is this constant flow back and forth internationally around all of that. As US consumers, we’re very used to importing those films, although we may not have the full cultural context for some of the stories that are in them. Some of the most viral horror films of the last two decades like Babadook, Train of Busan. These are ones that are coming from Sweden, Korea, Devil’s Backbone, Early del Toro from Mexico. International import of horror films into the US is really important. Then there’s the flip side of Americans trying to remake popular international films, particularly Japanese films like The Grudge and The Ring. That conversation is really important.

Ricky Mulvey: To your earlier point, like Vince Vaughn. Did you ever see the Vince Vaughn movie freaky?

Catie Peiper: Yes. 

Ricky Mulvey: That to me is just one of those like the glorious of gory movies. I didn’t particularly enjoy it because of that. That’s one where I would assume Europe would have some problems with that movie.

Catie Peiper: Yeah, or ratings. I would say all of us is moving to a more China-accepted because there’s a lot of government policies that play there recently. But in general, we’re moving to a much more mainstream main line to 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 interests in like, is this a domestic horror film? Therefore, I know what genre attributes to look for versus like, is this an East Asian horror film or European Asia or horror film. Because then I’m going know there are other genre elements that play.

Ricky Mulvey: You’ve got your Marvel’s, 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 is streaming everything and you’re competing against your TV and your iPad. Why have horror movies held up well, at the box office?

Catie Peiper: There’s so many reasons for it. I think the first is just it’s a transactional relationship. I know what I’m getting, what I go to a theater and I pay for a horror movie admission like I’m paying to get a good scare. 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. 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 fair a lot better. Then specifically with horror, there are certain jumps, 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. 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.

Ricky Mulvey: I think you could make a similar argument though for comedies. 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.

Catie Peiper: 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. We’re so used to consuming comedy on television, The Office, Parks and Rec, like we’re so used to small screen comedy now and it doesn’t rely on the sound systems, the widescreen, that dark room. It does rely on consuming communally, but we’ve been able to do that. We haven’t 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 set home sound system is.

Ricky Mulvey: As we’re getting toward spooky season, no, we’re already in spooky season. Do you have any favorite horror movies for spooky season coming up on Halloween?

Catie Peiper: Well, one that I have to admit, I actually personally have not watched yet, but it’s on my list for this weekend to go see is Smile. 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 the 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 and adds is always really very productive, it works really well with marketing. When I saw them start to do it with this film campaign, I was like, wow, someone who 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.

Ricky Mulvey: Go checkout, Smile. They were also able to save on marketing costs by just having, they’re just having actors do the creepy smile like baseball games and sporting events where there in the camera?

Catie Peiper: Yes, absolutely. Which I also appreciate again, in the history of marketing, a horror film was the first viral marketing campaign. The Blair Witch Project of sorts. There’s a long tradition of trying to find these fun moments of viral marketing in the genre.

Ricky Mulvey: Catie Peiper, thank you for your time. It’s always a pleasure.

Catie Peiper: Thank you. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about. 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.