How a Shrinking Beta Can Do Wonders for Your Portfolio
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Hershey Company's (NYSE: HSY) impressively low beta is a product of its blend of consumer staple products, which perform well in a down economy, and premium products, which perform better in a bolstering economy. The snack food company’s beta is around 0.5 on a 25-year, 10-year and 5-year basis, but we are encouraged by the fact that it is coming closer to zero. On a 3-year basis, Hershey’s beta is 0.4, and over the past year, it has dropped to 0.35. Adding to the defensibility of the stock is its 2.4% dividend yield. Billionaire Jim Simons is one of Hershey's top investors (check out Jim Simons' top picks).
Hershey boasts a strong product portfolio, one that makes it the largest producer of chocolates in the U.S. It is estimated to own over 40% of the market. Boding well for Hershey is its entry into international markets, namely China, India and the Middle East. China alone has one of the most rapidly growing affluent household economies; Hershey’s expects China to become the fifth largest global confectionery market by 2016. The snack company believes that the higher growth rates in emerging and developing markets will help its international business to account for 25% of its total business over the next five years, up from the current share of 10%.
From a valuation standpoint, Hershey currently trades around 22x earnings, which is a 20% discount to the industry average of 28x. Hershey expects its organic sales to grow 5-7% (3%-5% previously) next year and plans to hit $10 billion in net sales by 2017. With these robust growth prospects, we believe that the snack and candy company should at least trade more in line with the industry.
What about Hershey's competition?
Mondelez International (NASDAQ: MDLZ) is the global snacks business that was part of Kraft Foods. The Kraft Foods breakup led to Mondelez – the global snack company – and Kraft Foods Group – the North American grocery business. Mondelez has the highest beta of the five stocks listed at 0.6, and one of the lowest dividend yields at 2.1%. Still, we are encouraged by Mondelez’s solid exposure to international markets, with over 80% of 2012 revenues expected to be derived from outside of the U.S. Interestingly, Warren Buffett sold off nearly 50% of his stake last quarter (check out Warren Buffett's newest picks).
General Mills (NYSE: GIS) is another defensive stock with little correlation to the broader market, with a beta of 0.2. General Mills also pays a dividend that yields 3.3%. One of General Mills’ best growth opportunities is in the U.S. greek yogurt market. Although General Mills could be a solid addition to any portfolio for correlation reasons, we are not encouraged by its growth or valuation prospects. The stock trades at a PEG of 2.0.
PepsiCo (NYSE: PEP), meanwhile, has been seeing margin compression thanks to increased spending on advertising in an effort to regain market share in the U.S. The beverage company currently has a strong position in international markets – in part due to its Wimm-Bill-Dann acquisition – but domestic market share isn't where most Pepsi bulls would like it to be. On the bright side, shares do pay one of the industry's stronger dividends with a yield of 3.2%. Billionaire Ken Fisher - founder of Fisher Asset Management - is one of the top-name Pepsi investors (check out Ken Fisher's newest picks).
Kellogg (NYSE: K) also pays a solid dividend yield of 3.2% and is seeing solid revenue contributions from its Pringles business. The Pringles acquisition should continue to help Kellogg shift more toward snacks and break into international markets. The Pringles line is expected to generate 10% of Kellogg’s revenues for next year, but for now the valuation of the food company appears high. The stock trades at 17x earnings and its PEG comes in close to 2.5. Ken Griffin - founder of Citadel Investment Group - upped his stake in the consumer staples company by over 4,000% last quarter.
In short, we believe that Hershey is one of the top packaged food stocks that is becoming more defensive despite its chocolate-heavy product portfolio. Being the global leader in sugar-based confectionery products makes Hershey a solid recession-resistant stock.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!