Hershey: A Sweet Selection
06/04/2004 12:00 am EST
Beth Gastonis one of the leading analysts behind the excellent work at Schaeffer's Investment Research . Here, she assesses a "sweet" investment selection–Hershey Foods–from a fundamental, technical, and sentiment-based approach.
"Hershey Foods (HSY NYSE) ) is the world's leading candy manufacturer. In addition to its eponymous line of chocolate bars, Kisses, and Hugs, HSY oversees the brands Reese's, Twizzlers, Mounds, and Super Bubble. On the fundamental front, the company reported first-quarter earnings late last month that topped analysts' expectations by a penny per share. This was the fourth consecutive positive earnings surprise for HSY. The stock has been on the rise for more than a year, gaining 45% over the past 14 months.
"Throughout its rally, HSY has benefited from the continued support of its ten-week and 20-week moving averages. These intermediate-term ascending trendlines have worked in tandem to help buoy the shares north. From a longer-term perspective, HSY is sitting atop double-barreled support at the 80 mark. This was previously a level of technical resistance in 2002, but acted as support on a short-term pullback last month. The 80 level is also home to the stock's rising ten-month moving average. One notable caveat is that HSY would have to stumble nearly 10% lower to encounter this support level.
"Not only does HSY have a strong technical performance at its back, but it is not yet favored by speculative players. This combination makes the stock notably intriguing from our sentiment analysis perspective. Among near-term options (June, July, and August), there are only 4,300 open call positions (bullish bets) compared to more than 7,000 open put positions (bearish bets). The resultant put/call open interest ratio stands at 1.63, which is just 2% shy of an annual peak. This pessimistic speculation is a positive sign in our contrarian view, as it suggests that not everyone has been convinced of the stock's potential. As such, there is additional buying potential available on the sidelines.
"Another sign of pessimism is the fact that the number of HSY shares sold short surged by 32% last month to 2.57 million shares, the highest reading since February 2003. The number of shorted HSY shares has been on the rise since September, as bearish investors wager on a future decline in the stock. If the equity disappoints the bears and moves higher, a short-covering situation could arise, adding fuel to the rally. Finally, Wall Street has failed to commit to the shares. Eighteen brokerage firms currently follow the stock. Seven (38%) of these firms keep HSY on their buy list, while ten name the stock a hold and one designates it as an outright sell. The potential for future upgrades, therefore, is encouraging for the shares."