The Tootsie Roll Trade

Tootsie Roll is a company that often flies below the radar.  It has a closely held stock with a market cap of just $1.3 billion and an eponymous product whose recipe has not changed in over a century.  Overall, it is a small and steadily growing company that is not known to steal the headlines very often.

But since October 2011, it has presented an increasing investment opportunity.  Here’s why.  Over time, Tootsie Roll stock has closely tracked the performance of the broader stock market as measured by the S&P 500 Index.  The one key difference was that during periods sharp stock market correction, Tootsie Roll would typically hold up better than the market due to the defensive characteristics of its candy business.  Since late last year, however, shares of Tootsie Roll have stalled while the stock market has rallied sharply higher.

This sudden divergence has set up opportunity with Tootsie Roll shares, as one of two outcomes are likely to happen going forward.  Tootsie Roll shares will either rise to catch up with the stock market and resume its historical correlation, which implies attractive potential upside, or the stock market will correct lower toward levels where Tootsie Roll is currently traded, which implies greater downside protection than the overall market.  For these reasons, Tootsie Roll represents an attractive risk-adjusted stock investment opportunity in the current market environment.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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