Brown paper bags, untied shoes, cobblestones, and one unfortunately well-thrown egg -- those are my memories of Halloween. So little of that night was truly spooky that I feel compelled to offer America a treat this year.
Recognize that decision as a mightily daring one. Last year, Fool writers offered nine tricks -- and but a single treat -- to readers across the land. If you get a chance, read through the entries from Halloween 1996 (Ticker Treat & Scary Stocks). You'll see an absolutely astonishing rate of success. One dog after another collapsed in what has proven to be an extremely healthy market. Naming a treat this year, given successful Foolish trickery last year, is a contrary play. Naming a treat after three consecutive extraordinary years for common stocks is downright daredevilish.
By now you know my selection; you read the title of this essay and the sparkling title of this section. It's HERSHEY FOODSCORP. (NYSE: HSY), ringing in from Hershey, Pennsylvania -- not too many miles from my birthplace. Hershey was incorporated in 1927, thirty years after Milton Hershey began selling penny candies and sharing his personal fortune with poor and needy children. Ever since its inception, the company has made tens of millions of boys and girls sick with happiness and thousands of common stock investors happier still.
Today, with over $4.1 billion in trailing sales, Hershey is the leading supplier of sweets in America and is generating increasing amounts of sales internationally. Doubtless you know many of its brands, from Hershey bars to Reese's peanut butter cups... from York Peppermint Patties to Twizzlers (bleck!)... from Kit Kats to Skor Bars to JujyFruits.
The company is the birth mother of the acne-medication industry.
Hershey's Stock Performance
Before sifting through the business, let's consider how the stock has done. Hershey Foods has grown at an annual rate of 17% since 1971, methodically raising its dividend payments throughout and significantly outperforming market returns. Over the past five years, coincident to the appointment of CEO Kenneth Wolfe, the stock has sweetened the pot for its shareholders by zipping ahead at a rate of 25% per year. That also far outpaces the average returns from common stocks since 1992.
Seeing as past performance does not correlate perfectly with future results, you're probably wondering if Hershey Foods can continue to turbocharge market-beating returns for its shareholders. I expect it can. The company manages the top repeat-purchase brands in the candy industry. It has strong operations in the U.S. and has aggressively moved beyond Europe into Asia and emerging markets.
And, even with all the expansion, Hershey Foods has an attractive balance sheet. The company tightly manages its inventories, has a firm hold on payments due from distributors (accounts receivable), and the business has been enormously cash flow positive for years. Investors do, however, need to watch the direction of Hershey Foods' long-term debt closely. In mid-August, the company had its financial standing downgraded by S&P from double-'A'-minus to single-'A'-plus in the wake of a $500 million share repurchase.
What Wall Street is Saying...
Let's take a look at analyst estimates for Hershey Foods over the next two years.
The company has trailing earnings per share of $1.90 through six months of fiscal 1997. Analysts are projecting $2.24 for this year and $2.54 earnings per share for fiscal 1998. The YPEG valuation on Hershey is a mere $40. And the stock is trading at $53 3/4 as of this writing.
Hey there, what the heck is this guy doing suggesting I buy a $53 stock that he says is worth $40 per share?! What kind of rip-off is this Foolishness?
Why the Treat?
I'm dropping this chocolate bar into your paper bag not because I think it'll post extraordinary numbers over the next twelve months, serving up a delicious WIN for me in this collection of stock picks. Nope. I'm selecting Hershey for two reasons:
1) The company makes an excellent defensive holding in your portfolio. If the economy turns down, chances are that families are still going to load up on Jolly Ranchers and slurp down chocolate syrup. That's not true of expensive high-tech equipment or six-figure sports cars. Most of Hershey's products sell for less than five bucks. You can get a Skor Bar at the corner store for $0.55. So, even in dark economic times, the company should see stable sales and earnings figures.
2) This stock makes a wonderful first purchase for new investors. Your first cousin, who claims not to know a thing about the stock market, can buy a handful of shares because she thoroughly knows the company's products. Heck, she can put down a box of JujyFruits in the first ten minutes of a Johnny Depp film.
And what a great first investment for your children or grandchildren! If you put $250 in Hershey Foods for your eight-year-old tomorrow, added $250 each year, and if the stock grew at a rate of 12% per year over the next 50 years (not unreasonable), when your little guy turns 58-years-old, how much Hershey stock do you think he'd have?
Would you believe $670,000 worth before taxes?
This treat in your digital paper bag is not designed around profit in the next year, nor the next five years. I think Hershey Foods is an excellent long-term investment, measured in decades -- particularly for the portfolio of a young Fool who is looking to learn more about the world of business and the stock market.
Have a wonderful holiday, and when in doubt, don't throw that egg. And if you own any Hershey Foods, load up on the Kit Kats!
Tom Gardner, Fool