Hershey Offers Investors Certainty In An Uncertain Time

&l;img class=&q;dam-image bloomberg size-large wp-image-34531677&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/34531677/960x0.jpg?fit=scale&q; data-height=&q;809&q; data-width=&q;960&q;&g;

This Valentine&s;s Day, you may want to&a;nbsp;add&a;nbsp;Hershey shares&a;nbsp;to&a;nbsp;the chocolate Kisses you buy.

Hershey offers equity investors an attractive risk/reward balance for the present environment.

Equities&a;nbsp;may be up sharply in&a;nbsp;early-2019, but&a;nbsp;it&a;nbsp;gets tougher from here. A&a;nbsp;confluence of major indices are&a;nbsp;nearing key&a;nbsp;technical resistance.

Meanwhile, fundamental uncertainties&a;nbsp;that recently plagued markets remain. For example, analysts are marking down estimates at the&a;nbsp;steepest&a;nbsp;rate in four years. And&a;nbsp;the Global Economic Policy Uncertainty Index still&a;nbsp;resides near an all-time high.

Depending on your portfolio and personal objectives, it&a;nbsp;may be wise to&a;nbsp;take advantage of&a;nbsp;the recent rally&a;nbsp;and&a;nbsp;rotate&a;nbsp;more defensively.

Hershey is&a;nbsp;one name equity investors ought to&a;nbsp;consider.&a;nbsp;Shares are flat year-to-date, after holding&a;nbsp;up relatively well&a;nbsp;during the market swoon.

&l;img class=&q;size-full wp-image-762&q; src=&q;http://blogs-images.forbes.com/michaelcannivet/files/2019/02/HSY-v-SPX.jpg?width=960&q; alt=&q;&q; data-height=&q;468&q; data-width=&q;857&q;&g; Hershey vs. S&a;amp;P 500, Q4 2018 - Present

&l;strong&g;Hershey is a unique franchise with compelling economic traits&l;/strong&g;

&l;span&g;Hershey is one of the dominant players in the U.S. confectionery industry. The company owns about 45% market share of the chocolate aisle. The next closest competitor, Mars/Wrigley, has&a;nbsp;around&a;nbsp;30% share.&a;nbsp;&l;/span&g;

The vital signs for Hershey&s;s competitive position appear excellent. The&a;nbsp;firm has&a;nbsp;&l;span&g;increased market-share&a;nbsp;by&a;nbsp;approximately&a;nbsp;300 basis points since 2011, while&l;em&g;&a;nbsp;&l;/em&g;expanding gross margins.&a;nbsp;That demonstrates&a;nbsp;pricing power&a;nbsp;and brand&a;nbsp;loyalty&a;nbsp;with customers.&a;nbsp;&a;nbsp;&l;/span&g;

Despite strong&a;nbsp;fundamentals, Wall Street&s;s view of the stock&a;nbsp;can be described as&a;nbsp;lukewarm at best. There are only 3 Buy ratings, compared to 13 Holds and 3 Sells. Low to mild expectations mean plenty of room&a;nbsp;for upside surprises.

Hershey is best-known for its iconic chocolate brands like Reese&s;s, Kisses and Kit Kat.&a;nbsp;These are automatic purchases for&a;nbsp;a lot of folks (i.e. inelastic), which enabled&a;nbsp;Hershey to&a;nbsp;earn returns on capital exceeding 20%&a;nbsp;in the last two recessions.

Chocolate is&a;nbsp;a steady cash cow for Hershey, but U.S. consumer aversion to high-calorie foods is a persistent headwind for unit growth. Euromonitor Passport projects the domestic market to&a;nbsp;grow just 1.4% annually through 2023.

To improve top-line performance, Hershey&a;nbsp;is focusing&a;nbsp;on two strategies.

The first strategy is to extend the company&s;s international reach. Sales outside of North America accounted for&a;nbsp;10% of total sales&a;nbsp;in Q3 2018, up from 4.2% in the same prior-year period. While Hershey has a lot of runway potential to grow its presence abroad, particularly in under-served emerging markets, doing so results in short-term margin compression due to&a;nbsp;rising freight and logistics costs.

The second growth strategy is expanding Hershey&s;s&a;nbsp;reach in&a;nbsp;the $48.7 billion U.S. savory snack market. Hershey&a;nbsp;has only a&a;nbsp;1.1% share,&a;nbsp;which it aims&a;nbsp;to expand via acquisitions.

&l;span&g;Recent deals include purchasing&a;nbsp;Amplify Snack Brands for $1.6 billion&a;nbsp;(closed in January) and Pirate Brands for $420 million (closed in October). These purchases add growing health-snack brands to Hershey&s;s portfolio, like Skinny Pop popcorn and Pirate&s;s Booty. My kids munch on both regularly.&a;nbsp;&l;/span&g;

While&a;nbsp;investing in&a;nbsp;growth,&a;nbsp;Hershey has&a;nbsp;kept debt&a;nbsp;leverage at a reasonable level, and distributed cash back to shareholders. The total shareholder yield, including dividends and buybacks, is 3.2%.

&l;strong&g;The time to own stocks like Hershey is late-cycle&l;/strong&g;

I recognize that food companies, even if they make something virtually everyone loves, like chocolate, aren&s;t the most exciting investments.

Seeing as it&s;s Valentine&s;s Day, I&s;m going to share a chart I hope will&a;nbsp;help you fall in love with Hershey at just the right time.

&l;img class=&q;size-full wp-image-776&q; src=&q;http://blogs-images.forbes.com/michaelcannivet/files/2019/02/HSY-vs-SPX-2000-until-Present.jpg?width=960&q; alt=&q;&q; data-height=&q;468&q; data-width=&q;855&q;&g; HSY&a;nbsp;vs. S&a;amp;P 500 Index, 2000 - Present

Since 2000,&a;nbsp;Hershey&s;s cumulative total return has &l;em&g;trounced&l;/em&g; the S&a;amp;P 500 (+609% vs. + 171%).

How did a business&a;nbsp;in a mature industry outperform by such a wide margin?

There&a;nbsp;were two really important junctures.

&l;ol&g;&l;li&g;2000&a;nbsp;- 2002: Hershey&a;nbsp;gained +51% while&a;nbsp;the S&a;amp;P 500 lost -38%.&l;/li&g;

&l;li&g;2008: Hershey&a;nbsp;shed only -9% while&a;nbsp;the S&a;amp;P 500 lost&a;nbsp;-37%.&l;/li&g;

&l;/ol&g;

Certain stocks, like Hershey, win long-term by not losing a lot&a;nbsp;in&a;nbsp;market dislocations.

None of us know precisely when the stock market will spiral.&a;nbsp;All we can say with reasonable certainty is that&a;nbsp;such events become more probable&a;nbsp;as cycles mature. Consider&a;nbsp;what&a;nbsp;transpired late-last year a glimpse of what&a;nbsp;will come again, and use rallies to prepare.

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&l;em&g;Disclosure: I own Hershey in client accounts that I professionally manage.&a;nbsp;&l;/em&g;