Low Volatility in Sweets and Eats

06/03/2019 5:00 am EST

Focus: CONSUMER

Eddy Elfenbein

Editor, Growth Stock Advisor

Low volatility — or Low Vol — has been killing it lately. If you’re not familiar with the phrase, I mean stocks with low market volatility. These are shares of companies that don’t move around a lot, asserts Eddy Elfenbein, editor of Growth Stock Investor.

Since late April, the S&P 500 Low Vol index has held up quite well. It’s even advanced some. That’s in marked contrast to the higher volatility stocks which have gotten their butts kicked. The gap between the two seems to grow wider each day.

There are several good reasons to like Low Vol. One is that there’s a lot of academic research indicating that historically, Low Vol has been a big winner.

Why do some stocks exhibit below-average volatility? It’s usually because they’re conservative companies. Your typical Low Vol stock is a company that’s been around a long time in a stable industry and it’s not about to get knocked off its perch.

There’s also the peace of mind that Low Vol brings. When the market gets rattled, I know my Low Vol positions are holding steady. In fact, they often rise because scared investors flock to safety.

Also, Low Vol stocks often offer generous dividends. That helps scare the day traders away. After all, it’s a bigger risk for a “short” to bet against a stock that’s paying a good dividend.

Low Vol tends to keep cool while delivering steady, long-term gains. Let’s take a look at two Low Vol stocks that are looking very good at the moment.

At the top of the list is Hormel Foods (HRL). This is the Spam stock, but don’t be fooled; Hormel is a lot more than that.  

Hormel owns a bunch of food brands including Dinty Moore stew and Country Crock. More than 30 Hormel bands are ranked #1 or #2 in their markets.

A few months ago, Hormel raised its dividend by 12%. This was its 53rd annual dividend increase in a row. (Not bad for lunchmeat.) I also like that Hormel has a “beta” of just 0.13, which is a measure of systematic risk. This means that Hormel is far less risky than most stocks. This is one of the lowest scores in the entire S&P 500.

On May 23, Hormel reported fiscal Q2 earnings of 46 cents per share. That beat expectations by one penny per share. But the market got spooked when Hormel lowered its full-year guidance. At one point, the shares were down more than 6%, but I’m not concerned. Here’s why.

The company now sees full-year sales of $9.5 billion to $10 billion. The previous guidance was $9.7 billion to $10.2 billion. They also lowered their EPS guidance to $1.71 to $1.85. The previous range was $1.77 to $1.91 per share.

The problem is that African swine fever in China upended the global hog market. That led to rapidly increasing input costs. Hormel has worked to pass those costs on but it took a toll on their bottom line last quarter.

I’m not too worried about Hormel because while it’s facing an unfortunate problem, ultimately, it’s a manageable problem. In fact, it probably helps long-term investors because the share price isn’t as high as it should be. For now, I see long-term gains for Hormel Foods.

Our other Low Vol stock is Hershey (HSY). This is the #1 chocolate maker in North America. This company works to spread Almond Joy and lots of Kisses.

The company owns dozens of legendary chocolate brands like Hershey’s, Kisses, Reese’s peanut butter cups (a personal favorite), Twizzlers, Mounds, Almond Joy (under a license), York peppermint patties and Kit Kats.

Hershey also makes grocery goods like baking chocolate, chocolate syrup, cocoa mix, cookies, nuts, mints and bubble gum. Hershey has also expanded into snacks. The chocolate king sells to wholesalers and retailers throughout North America and overseas.

I have to point out that Hershey’s Q4 earnings report wasn’t so sweet. Comparable-store sales growth was flat. In North America, comparable sales actually fell 0.3%. Earnings came in at $1.26 per share which was a penny below estimates.

This was unusual for Hershey so I was interested to see if the slowdown would last into the first quarter. The good news is that Hershey rebounded quite nicely.

For Q1, the chocolatier had earnings of $1.59 per share. That’s an increase of 12.8% over last year. It also topped Wall Street’s consensus by 13 cents per share. I was pleased to Hershey reiterate its full-year guidance of $5.63 to $5.74 per share. Notice how good companies always bounce back. 

Hershey’s beta is just 0.13. Along with Hormel, that’s one of the lowest in the S&P 500. Both stocks currently yield over 2%.  Hormel and Hershey are two excellent stocks to own in an uncertain market. When times get tough, Low Vol is your best strategy.

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