Monday was another trading day with plenty of 52-week highs (156) and few 52-week lows (7). One of the seven lows was Hershey (HSY), one of the world’s most prominent chocolate and candy manufacturers.
I’ve been a fan of Hershey CEO Michele Buck for many years.
For one, she was the company’s first President and CEO when appointed in December 2016. Seven years later, women still don’t get promoted to top jobs nearly as much as they should. At the beginning of 2023, Buck was one of only 41 women (8.2%) helming an S&P 500 company.
Secondly, she’s done right by shareholders. Since her official start on March 1, 2017, through its all-time high of $276.88 on May 1, HSY stock was up 154%, more than double the index’s return of 76% over the same period.
Down nearly 20% in 2023, 44% worse than the index on a relative basis -- and its lowest level in two years -- now is the time to consider getting into Hershey stock.
Here are three ways to play it.
Straight Up. Buy HSY Stock.
The most straightforward play is to buy shares in Hershey's stock. As I write this, it's trading around $182.54, about $1.07 above its 52-week low. In 3-5 years, you’ll be happy you bought in the low $180s.
At the moment, however, investors are enamored with Big Tech, so don’t expect much movement until it reports Q4 2023 results in early February.
So far in 2023, Hershey’s results have been excellent. At the end of October, it reported Q3 2023 results that included a 14-cent earnings beat -- $2.60 vs. $2.46 consensus estimate -- with revenue of $3.03 billion, 11.1% higher than Q3 2022, and 2.2% higher than the Zacks Consensus Estimate.
Through the first nine months, its revenue was $8.51 billion, 9,5% higher than in 2022. On the bottom line, it earned $6.93, 22.2% higher than a year earlier.
For 2023, it expects 8% revenue growth over last year, with adjusted EPS 11.5% higher at the midpoint of its guidance. That’s approximately $9.50 a share.
The company’s stock dropped after reporting its third-quarter results. I suspect it was because Hershey didn’t raise its outlook for the year, opting to maintain its projections set at the beginning of 2023.
Buck’s comments in the Q3 2023 conference call also likely spooked investors.
“As many of you know, sector growth has slowed as pricing moderates and consumers across income cohorts are increasingly focusing on value. Many are cutting back on discretionary purchases, looking for deals, shopping at discount channels, and buying smaller sizes,” Buck stated.
“We have also seen more category and brand switching, with deflationary perimeter categories and more satiating foods outperforming.”
Empirically, I know from the more significant number of Halloween visits to my house that candy sales were likely more than adequate this year.
The Options Play
In Monday's options trading, Hershey had three unusually active put options.
1) Dec. 29 $177.50 with volume-to-open-interest (Vol/OI) of 7.51.
2) Jan. 19/2024 $220.00 with Vol/OI of 5.45.
3) Jan. 17/2025 $260.00 with Vol/OI of 3.61.
The December put is the only one of the three that’s out of the money. It had a bid price of $0.75 yesterday for an annualized yield of 15.0% were you to sell one or more of this contract. You could keep playing this put until you decide to buy HSY stock or move into another put or call. It’s a good income play through January leading up to Q4 earnings.
Selling the $220 strike requires some confidence that Hershey’s share price will increase leading up to earnings. Should you have to buy the shares, it had a $35 bid yesterday for a net price of $185, approximately 1% higher than its current share price.
From July through October, HSY was generally on a downhill trajectory. My guess is it’s very close to the bottom. If so, the $220 put is an interesting play.
Lastly, the long-term $260 put expires in 395 days, over a year from now. Its bid was $75 for a net price of $185.
The risk here is that something unforeseen happens to Hershey’s business -- Buck leaving would be a big one -- that rocks its share price into the $160s or even $150s. Then, you’re on the hook for a paper loss of anywhere from $35 to $15 per share. That wouldn’t be good.
While I don’t think the odds are good this will happen, the extended duration makes it a possibility to consider. On the other hand, if it bounces above $200, you would be getting an excellent entry point on the stock.
The Most Conservative Play
The third and final way to play Hershey's stock is the most conservative. It calls for you to buy an ETF or its options in one that owns Hershey, preferably with a significant weighting.
Alas, your best bet going down this road would be to buy shares in the First Trust Nasdaq Food & Beverage ETF (FTXG), which has a weight of 3.49%, making it the ETF’s 14th-largest position. That’s less than ideal.
It doesn’t get any better with options. The last time FTXG options traded was Oct. 18. Eight option contracts changed hands that day. Another two on Oct. 9. That’s the entire trading of the ETF in 2023.
I’ve rarely considered using options for ETFs except for the broad-market indexes. FTXG’s volume could be the reason why.
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