Low carb

One Investor’s Stock Market Crash is Another Investor’s Candy Crush

One Investor's Stock Market Crash is Another Investor's Candy Crush

If you watched the recent and likely temporary crash in chocolate kingpin stocks Hershey’s Foods (NYSE: HSY) you might think America is losing its sweet tooth. But a detailed analysis of the cocoa market and what happened to the stock suggests that smart money took advantage of the crash to buy the dip.

The most important meal of the day

I was checking out Trader Joe’s last week when the cashier smiled at me. It was because I had bought two bars of Ugandan dark chocolate and told him to be careful where he put them in the bag as he was holding the most important meal of the day.

Now, I have to admit, this premium chocolate costs a bit more than your average candy bar. But thanks to a mild medical condition, it’s the only one I can have. So even when I’m pinching pennies like everyone else, I still shell out a little more for this stuff from time to time, especially when I’ve had a rough day.

And I’m not the only one, as food allergies and concerns about healthy food alternatives are a growing consumer trend, driving chocolate consumption.

That’s why I started wondering why recession-proof Hershey Foods stocks were crushed along with other consumer stocks such as walmart (NYSE: WMT) and Target (NSDQ: TGT) a few days ago.

Chocolate companies are in the sweet spot

If you look in your average grocery store these days, you’ll see two separate aisles full of chocolate-related items. In one aisle you will see the traditional candies and their analogues, for example Snickers, M&Ms, Hershey’s Kisses and Reese’s Peanut Butter cups.

In the second aisle you will see the nutrition bars. These are also chocolate-based in many cases, but many of them now cater to the low-carb, keto, and soy-and-peanut crowd.

Both aisles generally have fairly good traffic, which is why chocolate consumption is expected to grow at an annual rate of 4% – 20% over the next five years.

Now consider the fact that the price of cocoa is currently very affordable for chocolate companies, while their ability to raise prices due to the general state of inflation is in good shape.

The combination of relatively inexpensive cocoa and strong customer demand gives HSY and other chocolate companies an edge over companies with rising commodity prices. Of course, this factor is only a plus as long as the supply chain holds up.

Additionally, Hershey’s, the world’s second-largest chocolate company behind Mars-Wrigley, recently announced what in this market should be considered a platinum-class earnings report, which featured:

  • 32% EPS growth
  • Sales Growth 16% to $2.66 Billion – Bullish Easter Season
  • Focus on affordability – 25% of product portfolio under $2
  • Double-digit growth in savory snacks – especially newly acquired pretzel products

Indeed, CEO Steve Voskul delivered the holy grail statement of any earnings conference call noting:

“We are increasing our sales outlook to reflect recent trends and additional customer programming in our pretzel business, as well as production gains that will allow us to capture continued high consumer demand. This, combined with our strong start to the first quarter, raises our full year net sales growth forecast to around 10% to 12%, a two point increase from our previous outlook.

In fact, a closer look at the price chart showed that the selloff, while dramatic, didn’t really affect the underlying technicals of the stock.

For example, the accumulation distribution (ADI) remained close to its recent highs. This means that short sellers are probably not very active on the stock. Additionally, On Balance Volume (OBV), although showing some weakness, is falling rapidly. This suggests that there is no mass abandonment of the stock.

Unsurprisingly, what we saw in the days following the crash was a nice surge in action, suggesting big money was coming in.

No added sugar

This quest has taken me everywhere. And the honest answer is that I couldn’t find a clear reason for the decline in Hershey’s stock, other than maybe some external factor.

So, since there was no real company-related news to explain the beating the shares suffered, here are the most likely downside possibilities:

  • The shares were sold by a hedge fund which obtained a margin call;
  • The stock was taken in a sell program by an index fund; Where
  • Inflationary pressures from high gas and food prices are putting consumers in a position where they are giving up one of life’s simple and relatively inexpensive pleasures.

Conclusion: Chocolate is good for the blues

When a stock crashes, it’s a good time to dive into the company and its industry, especially when there’s no reason for the crash.

In the case of Hershey’s Foods, the stock fell just days after a very upbeat earnings report and management presentation. When this happens, it suggests that the reason for the decline is probably not directly related to the business and that external and possibly temporary reasons are to blame.

Also, human nature is such that when times get tough, we seek comfort. And chocolate is as comforting as it gets. So if gas prices are high, it might be a good idea to go to the grocery store and buy some chocolate.

In other words, when people have the blues, the chances of chocolate consumption dropping significantly are low, unless there is a total global depression.

Indeed, based on the title’s rebound, it seems that the first two balls are the most likely reason for the title’s decline. All of this suggests that now may be a good time to consider snacking on the stock, or at the very least adding it to the shopping list with WMT, TGT and the rest of the blue chip stocks that are in being hammered by the current bear market.

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