With defense plays in favor Monday, Hershey stock is the IBD Stock Of The Day as it closes in on a handle buy point.
Hershey Co. continues to outperform as consumers brace for rising inflation and recession risk. As tech stocks led the market sell-off this year, investors sought shelter in defensive HSY stock and consumer staples stocks broadly.
Hershey makes and sells chocolates, sweets, mints and confectionery products. It has hiked prices on products amid cost inflation, which Wall Street expects to boost Hershey earnings.
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The IBD 50 stock has basically been consolidating since mid- to late April, after a strong rally at the start of the year. The relative strength line for Hershey stock fell, then rose sharply over the consolidation period.
Hershey's food and beverage peers also belong to the IBD 50 list of top growth stocks. Those stocks include Constellation Brands, Monster Beverage and McDonald's, all backed by rising RS lines at or near highs.
Food and beverage stocks led the market with defensive medical stocks Monday. Consumers' inflation expectations over the next year hit record highs, though the outlook over the longer term grew a bit more optimistic, CNBC reported, citing a survey Monday from the New York Federal Reserve.
HSY Stock Rises After 50-Day Bounce
Shares of Hershey edged up 0.4% to 220.67 amid a broad decline on the stock market today. The rally attempt Monday after two down days brought Hershey stock within 1% of a 222.75 handle buy point from a cup base, which stretches back to mid-May. But HSY stock has basically been consolidating since April; it rebounded from its 50-day moving average in June.
The midpoint of the 222.75 handle buy point is about the midpoint of base. While most of the base formed below the 10-week line, the handle has bounced back above 10-week support, which is a technical positive. The base shows some sharp swings including a gap-up, but the handle is fairly tight with generally light volume.
The RS line for Hershey stock rallied in June to two-year-plus highs, according to MarketSmith chart analysis. It's now just below the July 1 peak.
Hershey stock sports a superior Relative Strength Rating of 95. That means it has outperformed 95% of all stocks in IBD's database over the past year. It also owns the highest RS Rating in Hershey's industry group.
The food/confectionary group ranks a strong No. 24 out of 197 industry groups tracked by IBD. It's up roughly 5% year to date vs. a 20% decline for the S&P 500.
Constellation Brands, Monster Beverage and McDonald's are also in bases and not too far from buy points.
Kraft Heinz, whose shares are owned by investing legend Warren Buffett, and Mondelez are also holding up fairly well. Buffett's Berkshire Hathaway also owns See's Candies.
Still, while defense stocks can fare better in bear markets and recessions, they aren't necessarily safe. HSY stock and several other food and beverage makers plunged on May 18. Defensive plays typically lag when the market revs higher.
Hershey Stock: Earnings Jumped 32%
Hershey earns a superior IBD Composite Rating of 97 out of 99. This rating combines key fundamental and technical metrics in a single easy-to-use score.
Recent earnings boosted the Composite score. That is reflected in a solid EPS Rating of 89.
On a per-share basis, Hershey earnings jumped 32% in the latest quarter as revenue grew 16%, FactSet shows. Both earnings and sales accelerated sharply from the prior quarter. The company has made several acquisitions.
Over the past three quarters, Hershey's EPS rose 19.4% on average, above the 11% average over the past three years.
Sales grew 9.6% over the last three quarters, above the 6% average over the past three years. The gains coincide with the Kit Kat owner's expansion into healthier "natural" brands via recent acquisitions, such as Lily's chocolates.
Analysts polled by FactSet expect Hershey's earnings per share to grow 12% for the full year, which would mark the fifth straight year of annual EPS growth. They're seen growing a further 8% in 2023 as sales grow 4%.
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Price Actions Seen As Earnings Driver
On April 28, Hershey handily beat Wall Street's earnings estimates for the March quarter. It also raised its full-year 2022 sales and earnings outlook "despite an increasingly challenging and inflationary environment." That led to a flurry of price-target upgrades for Hershey stock.
In a July 8 note, Bank of America analysts noted HSY will increase prices 14% on average across a range of SKU's (stock keeping units). They expect "a modest" earnings contribution from the pricing move in 2022 and a "potentially more meaningful" one in 2023, with a buy rating on HSY stock and price target of $240.
"This is justified, in our view, as HSY has maintained underlying sales momentum despite tough comparisons, executed on pricing actions across its portfolio and maintained a strong balance sheet position allowing for growth potential," BofA analyst Bryan Spillane and his team wrote. But he's watching cost inflation and margin pressure.
The IBD 50 stock shows seven quarters of rising fund ownership, according to the IBD Stock Checkup tool. As of June, 2,152 funds owned HSY stock, up 6% from March.
Hershey, with its namesake headquarters in Pennsylvania, reports for Q2 on July 28.
