3 Best Chocolate Stocks to Buy Now for Cocoa Exposure

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We take a break from the usual to talk about something we can all rally around. Chocolate! In fact, I’m nibbling on a chocolate bar as I write this. As do many people around the world. But the obvious key ingredient in chocolate, cocoa, has a lot to do with how affordable chocolate is to buy. No one is surprised to see the price rise before Halloween each year. But during the past 12 months, the price of cocoa has risen at a rate that can only be described as scary.

According to the S&P GSCI Cocoa index, prices for this commodity traded in a fairly predictable range for about a decade, until October of last year. Then, seemingly out of nowhere, the price of cocoa skyrocketed, as if intent on breaking through the glass ceiling in Willy Wonka’s chocolate factory. A more than 150% increase in under six months naturally has investors wondering what to make of the sharp rise.

This article looks at three stocks that may be beneficiaries of a reversal of that sharp rise in the price of cocoa. They are all companies for whom chocolate is their main product, and as with any food company, the prices of the ingredients that go into the product are a key factor.

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Why Are Cocoa Prices Rising?

The price of cocoa rocketed higher due to disruptions in supply chains in key cocoa producing nations, such as the Ivory Coast and Ghana. Together they account for more than half of where global cocoa originates from. Disease has a lot to do with it, disrupting planting patterns and delaying the ability for farmers to use their land productively.

Methodology For These Best Chocolate Stock Picks

While companies can hedge those price spikes, hedging is a cost. So in looking forward to a reversal in the price of chocolate after such a rare move, it could make cocoa-reliant stocks more attractive. More importantly, these are well-run businesses for which fluctuations in the price of a key underlying commodity is not new. Perhaps the rate of increase is rare, but this is a case of good business operators simply finding ways to navigate through a rough period.

The key fundamental valuation statistic I focused on here was price to sales ratio. While earnings are an important facet of investment analysis, earnings can be manipulated by companies in many ways, far easier than sales. Earnings tend to have a lot more “noise” in them than sales. So for this analysis, price-to-sales and the fact that these three stocks all sell at much lower multiples than in the recent past, prompted my decision to prioritize it here.

For all three of the chocolatiers I selected, that statistic is well below where it was just over two years ago, at the start of 2022, when the broad stock market peaked. I focused on companies whose main business is chocolate, rather than some of the giant U.S. consumer companies that offer a wide range of chocolate cookies, cakes and other products. So, this is a trio for true chocoholics, like me.

3 Best Chocolate Stocks for Cocoa Exposure

Data source: YCharts

1. Hershey Company (HSY)

Stock Price (4/8/24 close): $194
Dividend Growth (past 3 years): 15%
P/E to Growth (PEG) Ratio: 1.6
EPS Growth (Year Over Year):14%

Why HSY Stock Is A Top Choice

Creator of the “great American chocolate bar” and a town in Pennsylvania named for it, HSY is truly a U.S. icon. Some of us grew up on the “core four” mini chocolates–milk, special dark, Krackle and the gentleman of chocolate, Mr. Goodbar–but Hersheys has grown over the years by folding in other famous brands, including Reese's, Almond Joy, Heath, Milk Duds and York mint patties. Full-year 2023 net sales increased 7.2% to $11.2 billion and net income improved 13.8% from the prior year to $1.9 billion. The company’s ability to grow earnings and dividends over the years has a lot to do with Hershey’s ability to maintain its “moat” or its sustainable competitive advantage. It has about one-third of U.S. chocolate sales.

2. Nestle SA (NSRGY)

Stock Price (4/8/24 close): $104
Dividend Growth (past 3 years): 6%
P/E to Growth (PEG) Ratio: 0.9
EPS Growth (Year Over Year): 24%

Why NSRGY Stock Is A Top Choice

NSRGY looks good for its age, more than 150 years old. The world’s biggest food and beverage company by sales, Vevey, Switzerland-based Nestle’s diverse offerings include brands such as its classic Nestle’s Crunch bar, Nescafe, Perrier, Pure Life and Purina. The irony of the last on that list is that chocolate is very dangerous to dogs, so we’ll assume the Crunch bars and dog food is not made in the same facility. NSRSY has more than 270,000 employees worldwide, and sells in 190 countries. Total sales for 2023 decreased 1.5% from the prior year but free cash flow increased CHF 3.8 billion. The company expects organic sales growth of 4% and underlying earnings per share in constant currency to increase 6% and 10% in 2024. Selling at less than its earnings growth rate as noted above, this European giant is a strong comeback candidate.

3. Lindt & Sprungli (CHLSY)

Stock Price (4/8/24 close): $11.78
Dividend Growth (past 3 years): 11%
P/E to Growth (PEG) Ratio: 1.7
EPS Growth (Year Over Year): 20%

Why CHLSY Stock Is A Top Choice

Another Swiss-based firm, but with a focus on premium chocolate. CHLSY’s namesake Lindt and Lindor brands have had a presence in the U.S. for some time, but the company has grown by adding some popular niche U.S. chocolate companies. Ghirardelli, Russell Stover and Whitman's all fall under CHLSY’s ownership. Despite cocoa prices reaching historic highs, Lindt & Sprungli had 10.3% organic sales growth in 2023. The company is clearly not as well known as Hershey or Nestle, but its low debt ratio and strong return on equity, plus its expansion of its brand in the U.S. via storefronts and packaging creativity make it one to watch going forward.

Bottom Line

The chocolate business has been anything but sweet lately thanks to the skyrocketing price of cocoa, in part due to crop yields in West Africa being impacted by weather and diseases. But based on the ability of these companies to weather this storm and the stability of their businesses before these headwinds arose, they may come out the other side of this abnormal input cost phase in solid shape, and with a comeback story that might motivate investors.

3 Tasty Chocolate Stocks To Buy Now For Cocoa Exposure