Hershey: Comfort Snack, Comfort Stock

The Essence of Equity Low Volatility

I’m not usually impressed by standard quant risk-measurement metrics such as beta, which only measures stock prices and cannot be expected to persist into the future, unless the future resembles the past, which sometimes happened but often doesn’t.

But I bring good news for fans of The Hershey Company (HSY): The stock’s incredibly low (i.e. conservative) 0.46 Beta is accompanied by fundamentals that suggest the business is likely to remain stable. And a stable business leads to stable fundamentals, which leads to earnings stability, which fosters stable stock prices. So HSY’s Beta is for real, as opposed to many low Betas that result from volatile stock price action that just so happened to have been uncorrelated to the S&P 500 during the measurement period used.

Hence HSY is one of the selections in the fundamental-oriented Low-Volatility Smart Alpha model introduced here recently and which can be tracked on Portfolio123’s Ready-to-Go platform.

A Classic Low-Volatility Business

We all know how popular the Hershey brand is and about how it’s treat-oriented low price-point nature keeps demand relatively stable even during difficult economic times.

Now is when a fundamental analyst might speak about returns on equity, leverage, etc., the results of a wide-moat business such as this and that which makes it possible to keep it going in the future. We’ll look at those. But I want to stop with a data set I’ve never before looked at quite this way, annual tax rates.

Table 1

These numbers, all incredibly close to the basic statutory corporate tax rate (for most large companies), indicates to us that aggressive financial strategy is not a prominent part of what goes on inside HSY’s headquarters. Some might turn their noses up at that. Actually, though, I like it. What I see here is a company that cares more about the basics of its business then about getting fancy with the financial spices.