If you looked at the recent, and likely temporary crash in the shares of chocolate kingpin Hershey’s Foods (NYSE: HSY) you might think that America is losing its sweet tooth. But a detailed analysis of the cocoa market and what happened to the stock suggests that smart money took the crash as an opportunity to buy the dip.

The Most Important Meal of the Day

I was checking out at Trader Joe’s last week when the cashier smiled at me. That’s because I had bought two bars of Uganda black chocolate and told him to be careful as to where he put them in the bag since he was holding the most important meal of the day.

Now, I have to admit that this premium chocolate costs slightly more than your average candy bar. But thanks to a mild medical condition, it’s the only one I can have. So, even when I’m pinching pennies like everyone else, I still plunk down a little extra for this stuff once in a while, especially when I’ve had a tough day.

And I’m not alone as food allergies and just plain concerns for healthy food alternatives are a growing consumer trend, which favors chocolate consumption.

Which is why I began wondering why shares of the usual recession proof Hershey Foods got crushed along with other consumer stocks such as Walmart (NYSE: WMT) and Target (NSDQ: TGT) a few days ago.

Chocolate Companies are in the Sweet Spot

If you look through your average grocery store these days, you’ll see two distinct aisles full of chocolate related items. On one aisle you’ll see the traditional candy bars and analogs, e.g. Snickers, M&Ms, Hershey’s Kisses, and Reese’s Peanut Butter cups.

In the second aisle you’ll see the nutrition bars. These are also chocolate based in many cases, but many of them are now catering to the low carb, keto-diet, and soy and peanut avoiding crowd.

Both aisles usually have pretty good traffic, which is why chocolate consumption is projected to grow at a 4% annual rate – 20% over the next five years.

Now, consider the fact that the price of cocoa is currently very affordable for chocolate companies, while their ability to raise prices due to the general state of inflation is in good shape.

The combination of relatively inexpensive cocoa, combined with solid customer demand gives HSY and other chocolate-based businesses an advantage over businesses whose primary materials are rising in price. Of course, this factor is only an advantage as long as the supply chain holds up.

Moreover, Hershey’s, the number 2 chocolate company in the world, behind Mars-Wrigley recently announced, what in this market has to be considered a platinum class earnings report, which featured:

• 32% EPS growth
• 16% sales growth to $2.66 billion – Bullish Easter season
• Focus on affordability – 25% of product portfolio priced at less that $2
• Double digit growth in salty snacks – especially newly acquired pretzel products

Indeed, CEO Steve Voskul uttered the holy grail statement of any earnings conference call by noting:

“We are increasing our sales outlook to reflect recent trends and incremental customer programming on our pretzel business, as well as production gains that will enable us to capture continued, elevated consumer demand. This, combined with our strong Q1 start, increases our full year net sales growth expectation to approximately 10% to 12%, an increase of two points, versus our prior outlook.”

In fact, a closer look at the price chart showed that the selloff, although dramatic, didn’t really affect the underlying technical aspects of the stock.

For example, Accumulation Distribution (ADI) remained near its recent highs. That means that short sellers are not likely very active in the stock. Moreover, On Balance Volume (OBV), although showing some weakness is dropping rapidly. That suggests that there is no wholesale abandoning of the stock.

Unsurprisingly, what we saw in the following days after the crash was a nice jump in the stock, suggesting that big money was moving in.

No Sugar Added

This quest took me all over the place. And the honest answer is that I could not find a clear reason for the decline in the shares of Hershey, other than perhaps some external factors

So, since there were no real company related news to account for the drubbing taken by the shares, these were the most likely possibilities for the decline:

• Shares were sold by a hedge fund who got a margin call;
• The stock got caught in a sell program by an index fund; or
• Inflationary pressures from high gasoline and food prices are putting consumers in a position where they are giving up on one of life’s relatively inexpensive and simple pleasures.

Bottom Line: Chocolate Is Good for the Blues

When a stock crashes and burns it’s a good time to do a deep dive into both the company and its sector, especially when there is no reason for the crash.

In the case of Hershey’s Foods, the stock fell just a few days after a very upbeat earnings report and presentation from management. When that happens, it suggests that the reason for the decline is likely not directly related to the company and that external and perhaps temporary reasons are to blame.

Moreover, human nature is such that when times get hard, we look for comfort. And chocolate is as comforting as it gets. So, if gasoline prices are high, it may make sense to take a walk to the grocery store and buy some chocolate.

In other words, when folks have the blues, the odds of chocolate consumption falling significantly are low barring an all-out global depression.

Indeed, based on the stock’s rebound, it looks as if the top two bullets are the most likely reason for the drop in the stock. All of which suggests that this may be a good time to consider nibbling at the stock, or at the very least add it to the shopping list along with WMT, TGT, and the rest of the beaten-up blue-chip stocks that are being hammered by the current bear market.

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