With the S&P 500 Index up 14% in 2023, it has been a surprisingly good year for many of the stock market's biggest names. However, two of the most well-recognized brands in the United States -- Nike (NKE 0.19%) and Hershey (HSY -0.53%) -- have not joined in on this fun. These two businesses have not only missed this rise but have seen their share prices decline by 22% and 10% this year, respectively, leaving them well below their 52-week highs.
So, have these two iconic brands finally run out of marketing steam -- or is this drop a blessing in disguise? Here's why I'm thinking the latter.
Nike: A rare discount
Despite wearing the crown as the world's largest seller of footwear and apparel, Nike's stock price is virtually in the same place today as it was five years ago. While the company has grown its sales by a satisfactory 34% over that time, the market has reeled in its once-premium valuation. Consider its price-to-sales (P/S) ratio.
NKE PS Ratio data by YCharts
Temporarily above 6 times sales, Nike's current P/S of 2.8 is as low as it has been since 2017 -- outside of a few days during the 2020 crash. So, is this deep discount a flashing buy signal? I think yes for four reasons:
- The No. 1 brand: Nike is the brand for athletic footwear and apparel, ranking in 13th place on Kantar Brandz's Top 100 Global Brands report from 2022.Since 2006, stocks with brands in the report have outperformed the S&P 500 Index, posting returns of 357% versus 245%. This highlights the wide moat a brand can create thanks to its robust pricing power.
- A digital behemoth: With over 500 million visits in the last quarter (without China) across its four apps -- Nike Mobile App, SNKRS, Nike Training Club, and Nike Run Club -- the company's mind share among younger, tech-savvy generations is immense.With nearly 18 million worldwide downloads, the Nike app is three times larger than its closest direct-to-consumer (D2C) retailer, Adidas.Meanwhile, its SNKRS app was the most downloaded sneakers app globally as of 2021.This leadership position across the digital retail realm is vital to investors as the company continues to focus on D2C sales as the future of its business.
- Top-tier profitability: Nike has averaged a profit margin of 10% and a return on invested capital (ROIC) of 24% over the last decade.ROIC measures how well a company generates profits compared to its debt and equity, with high-ROIC stocks historically outperforming their peers. The company's current mark of 21% places it near the top quartile of the consumer cyclical sector of the S&P 500.
- Higher-than-normal dividend: With a 1.5% dividend, Nike's yield is its highest since 2011.Despite this outsized yield, the dividend payments only use 40% of net income, leaving ample room to continue boosting quarterly payouts that have tripled over the last decade.
With guidance for mid-single-digit revenue growth and a two-percentage-point increase in gross profit margins in 2024 -- as supply chain conditions improve and inventories continue declining -- Nike should see better profitability in the upcoming year. Thanks to this outlook, the four promising factors mentioned earlier, and a reasonable valuation that hasn't been seen for years, Nike looks like a tremendous S&P 500 dividend stock to buy hand over fist heading into October.
Hershey: A bedrock stock
While the Hershey brand does not pack quite the power of an international advertising behemoth like Nike, it is almost equally recognizable in the United States. According to Statista, the brand awareness scores for Nike and Hershey were 95% and 93%, respectively, making them the most recognizable brands in their industries.
Thanks in part to this market-leading brand awareness, the company estimates it controls a 45% share of the U.S. chocolate market and a 31% share of the U.S. CMG (candy, mint, and gum) market. This stranglehold on what may be the country's most recession-proof industry makes Hershey the type of bedrock S&P 500 stock investors would love to have anchoring their portfolios -- at a reasonable valuation.
That's where the company's 20% drop in share price over the last three months and 26% haircut from its 52-week highs make it an alluring pick. Just as recently as a few months ago, Hershey's traded at a downright lofty 34 times earnings.
HSY PE Ratio data by YCharts
However, its P/E ratio has plummeted to 24 since then. With the shares now changing hands at this much more reasonable valuation, the company's slow and steady sales growth rates become much more palatable, especially considering its industry-leading ROIC of 22% and net profit margin of 16%.
These profitability figures are all the more impressive, considering that cocoa and sugar prices are near decade-long highs.
Should these normalize over time, Hershey's could see an incremental boost to its bottom line. Best yet, the company's 2.1% dividend has been increased for 13 consecutive years and still only uses 46% of its net income -- leaving plenty of wiggle room for future growth.
Thanks to this combination of brand power, discounted valuation, and dividend growth potential, Hershey's is an elite S&P 500 bedrock stock to buy hand over fist in October.
