Sweetening the Pot with Candy Stocks

Brenda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Time-honored blue chips stocks with healthy track records can be found amongst candy companies. Although some cyclic behavior is to be expected as spikes are sure to be found around Easter, Valentine's Day, and Christmas, candy stocks have shown steady growth and are not going to be subject to the volatility or sudden de-listings that happen to tech stocks. Here are a few choice morsels to sink your teeth into.

Hershey

Perhaps the most iconic brand in candy history, The Hershey Company (NYSE: HSY), is famous for Hershey's Kisses, the "melt-in-your-mouth" Hershey's bars (with and without almonds), and for the amusement park located in the town of Hershey, PA.  Although my Foolish compatriots have only seen fit to give this stock a CAPS rating of 3 out of 5, most of the comments on the company now are quite positive.  And if you take a close look at a two-year growth chart vs the S&P 500, you can see that Hershey has pretty consistently outperformed it. 

A possible reason for the buoyancy in Hershey's stock right now are the rumors of a merger between Hershey and Nestlé (NASDAQOTH: NSRGY). Although the thought of a "Nestlé's Kiss" makes my blood run cold, I have to admit that this would be one powerhouse of a combined company. Another Foolish blogger with an unknown source gave us this anonymous insight

"Nestlé wants to purchase Hershey for a number of reasons. The brand has a lot of recognition in North America, and is a dominator in that market. Owning them would help our company [Nestlé] expand in the confectionary market of North America. Also, the brand [Hershey] has been growing in China, and would also help us in that market.", according to our source.

Even if this merger is just a sugar-coated dream, Hersheys is a solid blue chip stock that is worthy of a position in even a highly-conservative portfolio.  From the earning's report released on Apr. 25,2013, the company's results were highly positive with these highlights:

  • Net sales increase 5.5% driven by volume
  • Earnings per share-diluted of $1.06 as reported and $1.09 adjusted
  • Outlook for 2013 net sales reaffirmed, earnings per share-diluted updated:
    • Full year net sales expected to increase 5-7%, driven primarily by volume
    • Reported earnings per share-diluted expected to be $3.52 to $3.58
    • Adjusted earnings per share-diluted expected to increase about 12% and be in the $3.61 to $3.65 range

Nestlé

Another iconic brand, Swiss Nestlé is the creator of candy bars that most of us baby boomers grew up on, including O'Henry, Butterfinger, Nestlé Crunch, and Baby Ruth. (I'm actually having a really hard time continuing to write this without running to get one right now... I must keep the faith on the diet path.)

Fools love this stock - it has a CAPS rating of 5 out of 5 and the comments are mostly a virtual love fest (except, of course, for the Fools who still remember the baby formula scandal of the 80s). With a projected earnings growth of 7.1% over the next five years, a renewed strategy of sustainability, and rumors of a merger with Hershey, Nestlé is worth bagging. The company's stock is also trading significantly below its 52-week high of $73.90. A possible dark cloud on the company's future is the announcement that long-time CTO Werner Bauer is retiring. We Foolish investors can hope that the new "Willie Wonka" will have some of the same magic as Werner.   

Tootsie Roll

Who doesn't love Tootsie Rolls? Evidently a lot of Fools, as Tootsie Roll (NYSE: TR) only has a CAPS rating of 1 out of 5. Why? A price-to-earnings ratio of 35.96 showing overvaluation. Balance this with a 41+% price growth last year and it may mean that the company is ripe for a fall, especially now that sugar prices are heading upwards again. Why would this Fool think that it is a good stock to watch?

The company has historically been less than cordial to the investment community. 92 year old Melvin Gordon has run the company since dinosaurs were young, and he has never liked the idea of having investors have any say in his company whatsoever. He did report a slight increase in earnings per share in the last investors conference call, but not enough to justify the high share price. So why again does this Fool think this stock makes sense as a buy? 

Because it is a very strong brand, and Gordon will have to relinquish control at some time in the near future. When that happens, Tootsie Roll will make a wonderful strategic acquisition for Nestlé/Hershey or perhaps another food company that needs to diversify into the candy space.

Conclusion

In conclusion, candy stocks make stable, long term investments not only because America's sweet tooth will never die, but also because of the strong possibly of consolidation of the space through mergers and acquisitions. The long term growth potential is there, and the proof can be seen in the charts over time.  Only Tootsie Roll seems highly overvalued now, meaning setting a lower target price on our buy order would be the best advice. 

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

 


Brenda Johnson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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