Hershey Foods Corp (HSY-N)

Sold in September. Drought drove cocoa prices up. Passing prices on to consumers eventually made people close their wallets.

Sold early September last year. Thesis was negated by the facts. Inflation in cocoa; iconic brand carried them only so far, and eventually consumers pared back purchases. 

In the face of a stock-picking mistake, try not to compound it by digging in your heels and making up a narrative to support holding the stock. Rip off the Band-Aid, choose again, and avoid the opportunity cost of further drawdowns.

It hit a 52-week low today. Pays a 3.6% dividend, which can't compete against interest rates. Still sells at 16x PE. Maybe he will consider it at 14x PE. Look at Mondelez instead.

Didn't work out, sold around $200. Thought brand was bulletproof. Input inflation was endemic to the whole industry, but then volumes started to be affected. Accounting transition hiccups. Cocoa prices spiked, but have relaxed. K-shaped economy has lower-income consumers really picking spots for indulgences.

(Note the short timeframe.) He has about a 2% position. Likes that it has support ~$190 or so. Will be resistance ~$200. If it breaks out, lots of space ahead to move. Increasing price of chocolate caused stock to tumble, but now chocolate's moving down, so he's hoping for a breakout.

But if it breaks his stop-loss support level, he'll be out.

Iconic brand with many subsidiaries. However, recent M&A has not panned out well. Salty "snack" business not panning out as well as planned. Owns shares and will continue to hold. Expecting higher margins, sales and cash flow going forward. Cocoa prices are expected to fall as well. 

All 3 picks today are contrarian value propositions. Stock was crushed by skyrocketing price of cocoa. Nothing lasts forever. Cocoa's rounded over, and now the chart for HSY is ticking up after it based for a while and broke out. Fundamentally, the problems will get sorted, cocoa will be cheaper, and HSY profits will go up. Yield is 2.6%.

An example of how the fundamental story and the technical chart work together. 

Added to dividend growth fund. Seasonal business with 45% market share in North America. Also has "salty snacks" brands business. Earns excellent margins on business with very strong profits. Leading ESG rated consumer packaged goods company. Tripling of coco prices expected to fall in the coming months. Very good time to buy at 20x earnings. 

Expensive, and he's never understood why. Trades around 25-30x earnings. Most competitors trade 10-12 points lower. Pass.

Within its sector, one of the best on organic growth and margins. Weight-loss drugs are turning people off snacking. Not the growthiest company, trades at a big multiple. With interest rates coming down, investors are moving toward better growth profiles.

Unsure on direction of stock. Strong decline lately. Might be a good time to buy given small rebound in stock price. 

Halloween is the core selling season. Largest chocolate producer in NA. 45% dominant share in chocolate, 30+% in general confectionery. Small, but fast-growing, salty snacks business. Small business selling into both EMs and developed markets. 

Best-in-class operating margins, 10 points above peers. 26% ROIC at 3x its cost of capital, leading all peers. Best ESG rating. Pullback due to price increases and volume declines. Trades at 20x earnings vs. long-term average of 24x. Yield is 2.35%.

HSY is a mature consumer staple name and is now trading at 23x times' Forward P/E (historical averages range from 19x to 27x). HSY’s volume growth is largely mature, however, the company has decent pricing power, which helped drive revenue growth by double-digits in the last two years. The balance sheet is okay, with net debt of $4.5B and the net debt/EBITDA is now at 1.7x. Going forward revenue growth would be around 5% on average over the next few years. HSY also has consistently raised dividends and done share buybacks which we like.

Overall, stable, resilient businesses but not cheap, we think it is ok but have a hard time getting excited about a sub-5% grower (in a normal environment) trading at 23X forward earnings.
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The CEO turned it around and just reported an amazing quarter. Continue to own it.