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With the S&P 500 Index up 14% in 2023, it has been a surprisingly good year for many of the stock market’s biggest names. However, two of the most well-recognized brands in the United States — Nike (NKE -2.04%) and Hershey (HSY -2.61%) — have not joined in on this fun. These two businesses have not only missed this rise but have seen their share prices decline by 22% and 10% this year, respectively, leaving them well below their 52-week highs.
So, have these two iconic brands finally run out of marketing steam — or is this drop a blessing in disguise? Here’s why I’m thinking the latter.
Despite wearing the crown as the world’s largest seller of footwear and apparel, Nike’s stock price is virtually in the same place today as it was five years ago. While the company has grown its sales by a satisfactory 34% over that time, the market has reeled in its once-premium valuation. Consider its price-to-sales (P/S) ratio.
NKE PS Ratio data by YCharts
Temporarily above 6 times sales, Nike’s current P/S of 2.8 is as low as it has been since 2017 — outside of a few days during the 2020 crash. So, is this deep discount a flashing buy signal? I think yes for four reasons:
With guidance for mid-single-digit revenue growth and a two-percentage-point increase in gross profit margins in 2024 — as supply chain conditions improve and inventories continue declining — Nike should see better profitability in the upcoming year. Thanks to this outlook, the four promising factors mentioned earlier, and a reasonable valuation that hasn’t been seen for years, Nike looks like a tremendous S&P 500 dividend stock to buy hand over fist heading into October.
While the Hershey brand does not pack quite the power of an international advertising behemoth like Nike, it is almost equally recognizable in the United States. According to Statista, the brand awareness scores for Nike and Hershey were 95% and 93%, respectively, making them the most recognizable brands in their industries.
Thanks in part to this market-leading brand awareness, the company estimates it controls a 45% share of the U.S. chocolate market and a 31% share of the U.S. CMG (candy, mint, and gum) market. This stranglehold on what may be the country’s most recession-proof industry makes Hershey the type of bedrock S&P 500 stock investors would love to have anchoring their portfolios — at a reasonable valuation.
That’s where the company’s 20% drop in share price over the last three months and 26% haircut from its 52-week highs make it an alluring pick. Just as recently as a few months ago, Hershey’s traded at a downright lofty 34 times earnings.
HSY PE Ratio data by YCharts
However, its P/E ratio has plummeted to 24 since then. With the shares now changing hands at this much more reasonable valuation, the company’s slow and steady sales growth rates become much more palatable, especially considering its industry-leading ROIC of 22% and net profit margin of 16%.
These profitability figures are all the more impressive, considering that cocoa and sugar prices are near decade-long highs.
^SG2D data by YCharts
Should these normalize over time, Hershey’s could see an incremental boost to its bottom line. Best yet, the company’s 2.1% dividend has been increased for 13 consecutive years and still only uses 46% of its net income — leaving plenty of wiggle room for future growth.
Thanks to this combination of brand power, discounted valuation, and dividend growth potential, Hershey’s is an elite S&P 500 bedrock stock to buy hand over fist in October.
Josh Kohn-Lindquist has positions in Hershey and Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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