Hi, I’m John Healy, chief investment officer of Healy Wealth Management. Today I’m back again with another video about investing. Clients often ask us about how we invest in individual stocks. But how do we make our decisions? And as we approach Halloween, I thought I’d share an example of how we make decisions by saying a few words about the chocolate market and specifically Hershey’s. The Hershey Company.

Here’s some facts about chocolate. Chocolate is made from the seeds of the fruit of the cacao tree. Each fruit is called a pod on the tree and it’s shaped like a small football. It takes about five years for a tree planted from a seed to grow into a full cacao tree producing fruit, and the cacao tree can live for about 100 years, producing fruit for about 25 to 30 years.

It’s a tropical fruit, only grows the near the equator. Produces fruit year round, and it takes about six months for the flowers to grow into these pods. Or the fruits. Only about 10% of the flowers on the tree, turn into, or grow into the pods that have seeds. So, about 70% of the world’s cacao pods are grown in West Africa, the Ivory Coast, and Ghana.

So they’re about at, estimated about 1.5 million farms. And these are family farms where there’s an average about 8 people in each family. And child labor and forced labor have been problems that they’ve tried to solve. But, still ongoing battle. And the manufacturers like the Hershey Company are trying to eliminate it. It’s very fragmented.

There’s a lot of steps in the process of getting from the farm to the chocolate bar. It’s kind of ironic, you know, when you think about Halloween and how much we enjoy chocolate. Hershey’s and the Mars Company, which is a private company. Hershey’s is a public company. Together, they account for about 70% of the total chocolate market in the US.

Hershey’s is a little bit bigger than Mars, and that’s because the Reese’s Peanut Butter Cup is really the number one product that Hershey’s produces. Hershey’s bought the Reese’s company in the 60s and the Reese’s Peanut Butter Cup has been the number one chocolate product in the US since 1969. Number two chocolate bar, and it’s a chocolate bar, so it’s a different class.

But the chocolate bar, the Snickers has been the number one chocolate bar since, I think the 80s. And that’s produced by Mars. And of course, there’s the Hershey bar that’s been around since 1900. And then you’ve got Hershey’s Kisses. Very popular came about in the 1950s. And then M&Ms were like in the 40s. So Snickers is the Mars company.

M&Ms is Mars as well. And then non chocolate candies, really pale in comparison at Halloween. The number one non chocolate candy is Skittles and that’s made by Mars. So is chocolate food? I’d say no it’s more like coffee. The seeds from the cacao fruit, the pod. Like I said, they’re fermented. The process, you know, takes 6 or 7 days to ferment.

There’s a process for that that’s pretty involved. Then you dry them out in the sun. They do this on the farm, and then they’re roasted. Where, like coffee. You have more, attention paid to the fermenting and roasting process. Is chocolate addictive? I would say no, but, it has a lot of addictive qualities because it does have a huge impact on the brain.

Nutritionists are still trying to understand and study how different compounds. Chocolate has a lot of combinations of compounds. That’s unique. That does cause chemical and neurotransmitter activity in the brain with serotonin and dopamine and other, pleasure type, hormones and neurotransmitters. One of these compounds is PEA, they call it, and it’s called the love drug.

So a lot of, you know, this emotional reaction we have to chocolate is very real. And it can be quite addictive, particularly when you add the milk into the chocolate. Gives you a more creamy flavor, adds the, it increases the fat content. And then you have sugar. Also a very, habit forming, product. So, yes, I would say it’s a very, very, habit forming product.

Maybe not addictive, but certainly habit forming. It’s a great product. With the brands, you really can create a marketing dominance first, very much like Coke and Pepsi. I think of, Hershey’s and Mars. It’s very similar to Coke and Pepsi. You’ve got a first mover advantage with these two companies. They dominate the chocolate market just like Coke and Pepsi dominate the cola market.

Chocolate is a very unique and powerful product that people love. Much like the cola flavor is a great flavor that people just love because it’s not. There’s no taste memory with cola of cola flavor. And so it is the number one flavor for any, liquid drink. And, so you can drink a lot more cola than you can other flavored, drinks.

And so Coke and Pepsi really have that market. And so Hershey’s and Mars have the chocolate market in the US. So Hershey, Hershey’s goes back to 1900. Even before that, Milton Hershey founded the Hershey’s Company, in 1894 and then came up with the Hershey’s milk chocolate bar in 1900. That’s been the same ever since. The 1.55oz milk chocolate bar that we all know and love and grew up on with from childhood.

Great memories that we all have of it. It’s that memory that really gets you. It’s just like, you know Coke: you can say like Pepsi and Coke. You know, you do the taste test. People like Pepsi more when they don’t know what it is, but they do have that memory of the Coke Coca Cola flavor.

And it’s that memory that they don’t want to give up. And so that’s why Coke is more popular than Pepsi. Even though blind taste test would tell you that, people actually like the sweeter Pepsi flavor. It’s very similar with chocolate in that the mass produced milk chocolate that you see in Reese’s and Hershey’s, and Snickers, M&Ms, that basic kind of lower-

It’s not lower quality. It’s certainly not fine chocolate. Fine chocolate is more of a process where there’s more attention paid to the fermenting and the drying and the roasting process. And you have much more, uniform, beans. Once, the seed has been fully, fermented and roasted. It turns out you call it a bean at that point.

And the beans and fine chocolate are much more uniform, creating a much more distinct flavor that’s much more, smooth and the grinding of the beans and all. It’s a very big, big process where if you if you pay attention and do a good job with fine chocolate, it’s actually a much better product. But people don’t have the memory that they do with kids when they do have the, you know, the more mass produced very good chocolate and very well produced, but just mass produced and not as, high a quality, but still a great quality.

But just the memory that you have that really gets here, with, you know, the Hershey’s and Mars products and they’re never going to go out of stock. So it’s just a tremendous product to have a dominant position in. And these businesses are tremendously strong, huge competitive advantage. They have, very strong pricing power. During the pandemic,

Hershey’s and Mars were able to raise their prices right along with inflation. So you’re never going to have to worry about getting behind inflation. With the value of these businesses, it will grow along with inflation. Those are some great qualities of the Hershey Company. And it’s a terrific business. But again, when we look at investing just because it’s a terrific business, if you pay too much for the stock, for the common stock, for the ownership in the business, if you pay too much for it, it’s not a great investment.

Just as another aside, you know, we’re big Warren Buffett fans. Berkshire Hathaway, Berkshire Hathaway, Warren Buffett’s company bought See’s Candies in 1972. Just for perspective, if you look at what he saw, that’s really the first company that he bought at that point.

So kind of the bellwether company for him to buy. That was not just an asset play. He looked at this company as a growth and earning power type business. As we talk about with Hershey’s. And the valuation there, if you compare what, Buffett was able to get back then, the stock, the earning power, the free cash flow yield was 9%.

And they had not been raising prices. Their prices were way too low. And over the next ten years, Buffett was able to get his managers to raise the price on average, about 11% per year. And that created efficiencies to scale the business, to scale the earnings. So total return for Buffett in the first ten years of of buying See’s Candy, buying chocolates, in California mainly, small company, dominant market, the dominant market position in a small market.

But they were able to raise earnings over the next ten years after Buffett bought it, 20% that that growth of 20% plus the 9%, just base of earnings, it’s a 29% intrinsic value, expected return from the business. So that’s a great example of a, really good investment in a dominant company that Buffett made.

And that’s, you know, keep that in mind is how we really learned how to look at stocks and look at businesses to value and, compare them to other stocks and businesses that we’re looking at in the market. So, I hope you found that to be fun. As we’re looking at Halloween coming up and the kids going out and getting their candies, and that this has been a good illustration of what we do here when we look at investments in stocks.

If you have any questions, please don’t hesitate to reach out. Don’t forget to hit the like button and subscribe to our channel, our YouTube channel. Our mission here is to improve the financial well-being of our clients by addressing your wants, your concerns, and your problems with wise counsel and sound investing. Thanks for joining me, and I’ll see you in the next video.