E What We'd Pay For Hershey

The Hershey Company (HSY) stock continues to be stuck. With the market having been volatile we recently discussed at length with a member of BAD BEAT Investing this name and you will recall we discussed more broadly that we might see a rotation into dividend-paying consumer staples. Hershey stock performed pretty well during the volatility that the market experienced in the last quarter of calendar 2018. In the last few months, solid dividend paying names have continued to perform rather well. Hershey, however, is a name we have long been sour on. Sure, we have acknowledged that money can be made trading it, but as an investment, the stock has been essentially dead-money. As the name looks to drop below $100, can traders and possible long-term investors consider a position here? It is our opinion that the stock is a better value closer to $90, and both traders and investors should wait until the stock is well under $100 to do some buying. In this column, we discuss recent price action, performance, and discuss our 2019 projections. We also describe where we would be compelled to buy shares.

Stock held its own in calendar Q4 2018

We have been bearish on the name, calling it dead-money/overvalued in the past. While we still would love to own the name if it were ever cheap enough to yield 3.5%, we would have no problem owning it if it offered growth. But it isn't offering much growth, so we take a dividend investor/value oriented look longer-term. Frankly, we are a trading firm, and the name really has best been traded. With shares dropping following a mixed Q4, our member asked about the name. As such we wanted to talk about the name. The stock is still down tremendously in a year, though it rebounded some as investor's looked for safety in the last few months:

Source: BAD BEAT Investing

While share prices dove in 2018, they slowly gained steam to end the year. Here in 2018 the stock has pulled back and is now down to $103 following the Q4 report. The fall has us questioning whether a rally is likely after this drop, and whether it can be bought here. One thing we do feel confident about is that we just don't see the stock getting to a 3.5% yield, but it would be a golden opportunity to buy shares. The lowest the yield has been was just over 3%.

A nice yield, but wait for at least 3%

As we know, when a stock falls, the dividend yield improves. We have stated we would like to buy shares if they ever fell enough to yield 3.5%. One way in which a stock can offer a higher yield is if the company increases the dividend. Right now it is $0.722 quarterly, which translates to 2.8% at $103. To get to 3%, the price needs to hit $96 per share. To get to our 3.5% goal, shares need to hit $82-$83. That is asking a lot and would require a 20% drop. This is unlikely but a level we would buy hand over fist. From a trading and investing perspective, we believe that below $96 offers traders a solid risk-return level, whereas true value hunters should be eyeing the $80's. This is especially true if the company raises its dividend at some point, which is likely this year. Does performance justify a buy?

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Disclosure: Quad 7 Capital nor BAD BEAT Investing hold any positions in this ticker

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