The market fluctuations are commanding our attention. On Thursday, stocks inched higher for the first five hours, kinda chill and feelin’ groovy, before blasting higher in the final half-hour when a new wave of optimism over the weekend vote in Greece hit the Street.
The positive news at the start of the session came from a story about Intrade voting that showed pro-eurozone parties should finish well ahead in the Greek parliamentary elections.
The last-minute news was word from wire services that the central banks of the G20 countries had a secret plan to inject the global financial system with a massive dose of liquidity in case the weekend vote went awry and threatened to blow up the eurozone.
Of course, this doesn’t mean the central banks are actually going to supply new funds, only that they stand ready to do so. It reminds me of the Y2k bug non-crisis in 2000 in which a feared event was blunted when the Federal Reserve said it was prepared to prevent it from happening.
I’m sure there is a lesson in this sort of “pre-emptive reflexivity,” but it is well beyond the scope of our study now; we can let future economic Ph.D. candidates sort it all out.
High-Profile Stocks Make New Highs
The news about a potential reaction to potential future news helped push the Dow Jones Industrials higher late Thursday, turning a 80-point up session into a 155-point up session.
It was enough to make investors forget about the Spanish Requisition that started global markets on a sour note at the start of the week. I suspect most risk assets in U.S. markets have a shot at defying the rampant fear with a major move higher — corporate buybacks and insider buying are off the charts right now — once we get past a weekend that features “Indecision 2012, Athens Edition.”
All the feinting, shadowboxing and limbo dancing are part of the process of price discovery, or discounting, as bulls and bears determine their rivals’ vulnerabilities and shore up their own.
Yet, if you get past all the noise and smoke, something quite extraordinary is happening in the Dow: A number of major stocks are screaming higher to new highs every day lately, including AT&T (NYSE:T) Walt Disney (NYSE:DIS) and Altria (NYSE:MO) as well as similar stocks not in the benchmark index, such as PepsiCo (NYSE:PEP), Kimberly-Clark (NYSE:MKB) and Hershey (NYSE:HSY).
These are the sort of megacap consumer staples that can absorb a lot of volume, monsters of the midway, and their success shows that a ton of money is being put to work in the safest instruments all at once. This isn’t a drill, in short. It’s a sign of big money pulling serious simoleons from other harbors, such as bonds, and applying them to risky assets.
SPDR Consumer Staples (NYSE:XLP) actually hit a new all-time high itself on Thursday. Think about this a second: If all stocks were doing as well as the staples, the S&P 500 would be over 1,560 instead of still in the 1,330 area. The difference is that the broad market is being weighed down by energy, banks and tech.
To be sure, this is a very defense-oriented leadership — with the likes of Caterpillar (NYSE:CAT), Google (NASDAQ:GOOG) and JPMorgan (NYSE:JPM) nowhere to be found. But that doesn’t diminish its importance.
Stick to the basics. A recession and bearish stock cycle may still be around the corner in late summer, but meanwhile — as I argued a couple of weeks ago — we could easily see a last-gasp advance to celebrate a near-term resolution of a Greek solution that results in the S&P 500 heading as high as 1,404 points, led by food, drugs, cigarettes and phones.
Hershey Is No Dud
I have been talking about the strength of the food stocks all year, with profiles of Hershey Foods and Monster Beverage (NASDAQ:MNST), and others.
Digging a little deeper, one of my favorites (and my pick for InvestorPlace‘s Best Stocks for 2012) is still Hershey, and it has very little to do with any love of chocolate. In fact, I have been allergic to chocolate my whole life and have never even tasted it. Let’s revisit the story, and I’ll tell you what’s in store for the future.
Hershey is the leader in the North American chocolate market, with a 43% share of sales. Its dominance with its core Hershey’s Kisses line often can overshadow a number of iconic brands that you don’t immediately associate with the company.
Successful brands such as Almond Joy, Milk Duds, Reese’s, York Peppermint Patty, Kit Kat and Twizzlers — not to mention cookies and chocolate sauce — help define one of the best product lineups in the business. Hershey isn’t just candy bars in your local supermarket or convenience store. Its retail distribution network encompasses theater concessions, vending machine services and a food service division where Hershey products are one of many ingredients in other end products.
An example of the company’s food service division products include co-branded products like Dairy Queen blizzard desserts, Rich’s cookie dough made with Reese’s peanut butter, and Betty Crocker Ultimate Fudge brownies made with Hershey’s fudge.
You see, the company dominates the dessert aisle at your local supermarket, whether you see the name Hershey or not.
The unique manufacturing network consists of seven plants located primarily in the Northeast, with one plant located in Guadalajara, Mexico. This is the integrated network that allows Hershey to sell its 80-plus product brands in more than 60 countries around the world.
Recent quarterly results point to a market leader with no intentions of easing off the pedal. The firm increased its advertising and marketing budget and continues to introduce new products to the roster. First-quarter earnings of 96 cents per share came in a full 18% above analyst expectations and 32% higher than last year’s figures.
Additionally, Hershey was able to successfully raise prices to help offset higher raw materials including sugar, fuel and packaging costs. Few companies have the market position and pricing power to increase prices in a still-uncertain market environment like Hershey does.
This helped lead to an 11% increase in revenue and an adjusted gross margin improvement of 180 basis points, or 1.8%. In case you’re wondering, yes, improving margins in a rising raw materials environment is an extreme rarity, but it speaks to the economies of scale of the $15 billion leader.
While the outlook from Chief Executive John Bilbrey for the remainder of the year was cautious, he did slightly increase the company’s earnings expectations moving forward. Bilbrey is dedicated to building out the international platform, recently announcing the acquisition of Brookside Foods, a private Canadian confectionery firm. The focus, however remains on increasing sales in emerging markets, so expect more deals in the near term.
The stellar results pushed Hershey to a new all-time high last month, and it barely slowed down even in the May-June swoon despite the weakness elsewhere in the equity markets. HSY now trades at 19 times next year’s earnings expectations, a premium to its peers, but warranted given recent results.
If you factor in more favorable input costs for cocoa and sugar like many analysts are predicting, you’ll find there is virtually no reason not to chip some chocolate and other food stocks into your portfolio here at the start of summer.
Jon Markman owns a long position in Hershey.