It’s Easter. Along with its significance for Christians and its association with spring and renewal, it is a holiday for candy.
The average American adult who celebrates Easter will spend $151 on the holiday, according to the National Retail Federation. Candy likely accounts for a big portion of the total spending, which makes this a big weekend for companies such as
(ticker: HSY) and
(MDLZ), the maker of the go-to Easter basket candy, the Cadbury Creme Egg. Both stocks enjoy premium valuation multiples, so investors—like children—also love candy. But is the premium justified?
This pair of candy stocks trade for about 20 times estimated 2019 earnings, in line with historical averages and a premium to other consumer staples stocks and to the
Despite the richer valuation, both stocks have returned more than 15% a year on average for the last 10 years, right in line with the S&P 500 and the
Dow Jones Industrial Average.
Candy stocks pulled off that feat by growing earnings faster than other staples companies and faster than the overall market. Hershey, for instance, grew earnings at more than 10% a year on average for the past nine years. That is nearly twice as fast as the per-share earnings growth of the S&P 500 over the same period.
So it appears candy’s reputation as a good business is justified.
But can you buy candy stocks into a holiday and sell them after? Is there a great, hidden candy trade out there? Unfortunately, no.
There are other candy stocks out there, but too much M&A muddles results. Mondelez, which own Oreos in addition to Cadbury, was joined with Kraft brands until 2012.
Hershey is Barron’s purest proxy on candy seasonality. Maybe there is a post-Christmas hangover. Hershey stock usually drops after the holiday, on average—but that doesn’t feel like much of a trading strategy to us.
As a long-term investment, Wall Street likes Mondelez better than Hershey. More than 70% of analysts covering Mondelez rate shares Buy. That is 15 percentage points better than the average buy rating-ratio for stocks in the Dow Jones Industrial Average. Analysts are lukewarm on Hershey however. Only 3 out of 18 analyst covering Hershey rate shares Buy.
JP Morgan analyst Ken Goldman rates Hershey stock Neutral. He thinks Hershey’s premium valuation multiple isn’t worth it and prefers other stocks like Mondelez. Goldman rates Mondelez Buy with a $46 price target, about 8% below current levels.
(We aren’t sure why the target is below the current stock price. Goldman wasn’t immediately available for comment.)
Are there other candy stocks to buy?
Tootsie Roll Industries
(TR) is publicly traded, but it has no analyst coverage and trades for a big valuation multiple. Plus, the company is controlled by insiders.
And what about Easter’s iconic marshmallow Peeps? The are made by a private company in Bethlehem, Pennsylvania called Just Born. You can only get your marshmallow fix at the grocery store.
If investors stick with Mondelez and Hershey, they can probably sleep well at night—as long as they don’t sample too much of the product.
Write to Al Root at email@example.com