December 25, 2014
This Stock is Just a Few Dollars
Away From a Breakout 'Buy' Signal
By Melvin Pasternak
Shop in any mall, supermarket or drug store this holiday season and you'll see evidence of Americans predilection for chocolate at Christmas. However, demand at this time of year is only one reason The Hershey Company (NYSE: HSY), one of the world's largest chocolate manufacturers, continues to post solid revenue and profit growth.
According to MarketsandMarkets research, the chocolate industry pulls in revenue of about $83 billion annually. That's more than the GDP of over 130 nations combined!
Not surprisingly, consumption rises around the holidays. According to NPD Research Group, candy is the top snack purchased for the holidays. Half of all adults celebrating Christmas buy candy. During Halloween, Americans buy 90 million pounds of chocolate. For Valentine's Day, they purchase 48 million pounds, and for Easter, 71 million pounds. This demand underlies Hershey's growth.
Another profit booster for Hershey is the huge decline in sugar prices. Due mostly to oversupply in the world's largest sugar producer, Brazil, prices have fallen nearly 20% in the past six months.
CNBC reported that in the 13 times sugar has fallen more than 19% since 1980, Hershey's stock price has increased 77% of the time, with an average return of 24% in the period during sugar's drop and three months after the decline. There is little reason to suspect this time will be different.
Hershey is expanding its reach internationally. In December, the company announced the acquisition of the privately owned Canadian company, Allan Candy. The addition of Allan's chewy and gummy candies will enhance Hershey's diverse confectionary portfolio. This comes three years after Hershey acquired Canada-based chocolate brand, Brookside.
Beyond Canada, Hershey has made purchases in China. During the most recently reported third quarter, the company acquired an 80% stake in Shanghai Golden Monkey. With this purchase, management anticipates China will become the firm's second largest market (behind North America) by the end of 2015, with $500 million in expected sales.
In addition to international expansion, the company is focused on increasing sales volume through its retail channels. In the third quarter, 90% of all retail sales were from outlets and convenience stores. This represented a 3.3% gain from the year-ago quarter.
On the chart, we see shares are in a strong uptrend and within a few dollars of completing a nearly year-long base and breaking out to a new all-time high.
HSY has gained more than 60% from its October 2012 low near $65. In early 2014, shares reached an all-time high of $108.69. They retreated from this peak, bottoming below $88 in July of this year, which now marks a support level.
As the stock fell, it formed an intermediate downtrend. By November, HSY managed to break this downtrend line, and it has been moving higher ever since. Over the past three months, shares formed an intermediate uptrend line marked by steadily rising peaks.
The stock is very close to resolving an almost year-long basing pattern. The top of the pattern is marked by the February 2014 peak, and the bottom by $87 support. If shares can bullishly break resistance at their all-time high at $108.68, they'd complete the basing pattern.
The stock is very close to resolving an almost year-long basing pattern. The top of the pattern is marked by the February 2014 peak, and the bottom by $87 support. If shares can bullishly break resistance at their all-time high at $108.69, they'd complete the basing pattern.
According to the measuring principle for a basing pattern, calculated by adding the height of the pattern to the breakout level, shares could reach a new target of $126.96 ($108.69-$87.88 = $20.81; $20.81+$108.69 = $129.50.) At current levels, this target presents traders with more than 20% potential returns
Traders who want to minimize risk can wait until shares bullishly break out of the basing pattern and close above resistance, which will still leave them with a sizeable profit if the target is reached.
The upbeat technical picture is backed by solid fundamental growth projections.
Analysts estimate fourth-quarter revenue, scheduled to be reported in late January, will increase 6% year over year to $2.1 billion. For the full 2014 year, analysts expect a 4.8% sales increase to $7.5 billion.
Fourth-quarter earnings are estimated to jump 24.4% to $1.07 per share from $0.86 per share in the comparable year-ago quarter. Full-year 2014 earnings are projected to grow 8.1% to $4.02 per share, and increase another 10.7% to $4.45 in 2015.
Given the bullish technical and fundamental outlook, I plan to go long on this chocolate maker.
Risks to consider: Increasing dairy prices could hurt Hershey; however, this should be offset by sliding sugar prices.
Recommended Trade Setup:
-- Buy HSY on a close above $108.97
-- Set stop-loss at $96.89
-- Set price target at $129.50 for a potential 19% gain by mid-2015
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