Check Out That Tootsie Roll

Amazing! That's the only word for it. According to the book The Future for Investors by Jeremy Segal, seven of the top 20 performing stocks in the 1957 S&P 500 (based on their gains through 2003) were food companies (which includes snack and candy makers). Imagine getting top long-term market returns by skipping the risk of high tech and its 18-month product cycles, and by instead investing in conservative growth engines.

You could have been smiling big time handing out trick or treat candy last night if you had been a shareholder in those sugar-sweet candy companies Wrigley (NYSE:WWY) and Hershey (NYSE:HSY). Their compounded returns, with dividends reinvested, were 14.65% and 14.22%, respectively. Said another way, $1,000 invested in Wrigley in 1957 is now worth a staggering $603,877 at the end of 2003. And get this -- Wrigley was only No. 5 on the list.

Perched at the top is Tootsie Roll (NYSE:TR) with a 16.11% compounded annual return. That same $1,000 would have yielded $1,090,955 if it had been invested in the company that created the first wrapped penny candy 109 years ago. The same namesake candy still sells today for the equivalent of a penny.

In recent years, Tootsie Roll had no debt and accumulated a sizeable cash bank account. In 2004, the company spent $212.5 million to buy a strong market position in the bubble gum category from Concord Confections. Double Bubble and a few other brands are now part of the Tootsie Roll brand stable.

Well, the diversification move didn't juice up Tootsie's third-quarter results very much. Revenue was up 11%, principally because of the Concord brand additions. Net income rose an anemic 2.6%. Everything from borrowing costs for the acquisition to higher raw material costs hurt net income. Still, the company's after-tax profit margin was a strong 15.9% -- a much better return than the company was earning on its cash in the bank.

The company is poised to repay the acquisition debt in 2006 and is using its excess cash to repurchase shares and pay a 0.9% dividend. With its modest capital expenditure requirements (they were only $6.8 million in the first half of 2005), the company has the excess capital (and lots of borrowing power) to make other acquisitions if the opportunity arrives.

Analysts expect the company to grow earnings 9% a year for the next five years. With the stock trading at 23.5 times trailing earnings, it's not a bargain on the basis of price. But its high margins, excellent cash production, and shrinking share base offer long-term investors an excellent, conservative investment, with the chance to produce market-beating results.

If you're looking for past top performers that are highly regarded today, consider Motley Fool Income Investor recommendation HJ Heinz (NYSE:HNZ) and Motley Fool Inside Value pick Coca-Cola (NYSE:KO). Their 1957-2003 compounded annual returns were 14.78% and 16.02%, respectively.

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Fool contributor W.D. Crotty does not own shares of any of the companies mentioned in this article. Click here to see the Motley Fool's disclosure policy.