Sweet Outlook for Chocolate Duo

03/14/2017 7:00 am EST

Focus: COMMODITIES

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Cocoa tends to begin a seasonal decline in early to mid-March through the end of May, instituting a short position in our seasonal best-trade category, observes Jeffrey Hirsch, seasonal trading expert and editor of Stock Trader's Almanac.

One way to take advantage of this setup possibility is buying The Hershey Company (HSY). When cocoa prices rise, Hershey’s price tends to decline and the opposite often holds true as well. HSY is also a familiar household name for many.

HSY, like much of the broad market, has somewhat stretched valuations. Its trailing P/E ratio is around 32 and price/sales is around 2.2. However, HSY appears to be throwing in the towel on some less profitable global operations and plans to trim costs through workforce cuts.

A potentially leaner, more focused company could translate in higher profits and possibly an even larger dividend (currently yields 2.28%). HSY could be considered on dips below $108. If purchased a stop loss of $102 is suggested.

Even more interesting is Rocky Mountain Chocolate Factory (RMCF). With a market cap around $65 million, this is definitely a small-cap company. They are headquartered in Durango, Colorado and operate as a confectionery franchisor, manufacturer and retail operator.

RMCF’s valuation is reasonable with a P/E of 13 and a price-to-sales ratio right around 1.7. Cash on hand and debt are also reasonable. They also pay a respectable dividend (4.27% yield). 

After surging in mid-January due to impressive earnings, RMCF has retreated and has been consolidating those gains. Recent trading action has turned stochastic, relative strength and MACD indicators modestly positive and the 50- and 200-day moving averages were not violated on a closing basis.

RMCF could be considered at current levels with a buy limit of $11.50. If purchased, a stop loss of $9.70 is suggested. Falling input costs, reasonably valuation and solid growth prospects make RMCF attractive.

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