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Investment Opportunities

How to Play the New Bull Market in Dark Chocolate

It’s delicious. It’s healthful. It’s profitable, too. Isn’t it time you found a way to play the new bull market in chocolate?

On Tuesday, Swiss confectioner Barry Callebaut AG won the backing of the European Food Safety Authority for its claim that cocoa flavanols, the compounds found in dark chocolate, are good for blood circulation. The company has carried out more than 20 clinical studies since 2005, looking at effects of products made with a special process it developed that preserves up to 80% of flavanols.

While the request to use the health claim still awaits approval from the European Commission, the food agency’s blessing indicates that chocolate makers are likely to see an uptick in business as they offer new health claims on product labels.

Not that the industry was hurting before…

Chocolate is a $60 billion global industry today. The average American consumes 12 pounds of chocolate per year (58 million pounds are sold around Valentine’s Day alone). And the Swiss, Austrians, Germans, Irish, British, Norwegians, Danes, Belgians, Swedes and Australians all eat more than we do.

The confection has a long and storied history. Mesoamericans first cultivated cacao beans more than three thousand years ago. The Mayans made it into a sacred drink, offered it in tribute to kings, and placed it in the tombs of the nobility so they could savor it in the afterlife.

Common folk enjoyed it, too. Five hundred years ago, Spanish historian Oviedo y Valdes wrote, “It is the habit among Central American Indians to rub each other all over with pulpy cocoa mass and then nibble at each other.” (No word about the resulting population explosion.)

By the time Columbus arrived, cacao beans were the coin of the realm.  And it wasn’t long before Europeans back home were clamoring for it

The Healthy Side of Chocolate

But it isn’t just tasty. A 2006 Johns Hopkins study showed that eating a little bit every day is good for your health. Cacao helps the body process nitric oxide, a compound for healthy blood flow and blood pressure. It contains antibacterial agents that fight tooth decay. The cocoa butter in chocolate contains oleic acid, a mono-unsaturated fat that raises good cholesterol. Chocolate also contains phenyl ethylamine (a mild mood elevator) and flavonoids keep blood vessels elastic. Studies show that eating a little bit of chocolate once a week can reduce your risk of stroke by 25% to 45%.

Cacao is a storehouse of natural minerals. It’s a source of copper in our diet and an antioxidant on the order of green tea, protecting against heart disease and helping alleviate stress. Dark chocolate is rich in polyphenols, as is red wine. Chocolate can provide an energy boost, too. It’s an easy way to fuel up before, and during, intense activity.

Now that the chocolate industry can translate these health claims into greater profits, how do you play it?

Good, Better, Best…

You could buy Swiss giant Nestle (OTC: NSRGY.PK), but this is actually the world’s largest food company. So the effect of higher chocolate sales could easily be diluted by soft sales in other sectors.

A better way is the Hershey Company (NYSE: HSY). The Pennsylvania-based candy company is already bumping up against its 52-week high. And no wonder. In the recent quarter, earnings jumped 24% on an 11% increase in sales. I estimate Hershey will earn $3.25 this year and about 20% more next year. You’ll earn a 2.1% dividend yield here, too.

But perhaps the purest play is Barry Callebaut AG (OTC: BYCBF.PK). The Swiss confectioner is the world’s largest chocolate manufacturer, with a $4.5-billion market cap and operations that span the globe. In last year’s second half, the company reported a 20% increase in net income on a 7.2% increase in sales volume.

Today the stock is trading near the low end of its range. But thanks to new health and marketing claims, business should pick up in the months ahead. That makes chocolate – and companies like this that sell it – a pretty sweet opportunity.

Good Investing,

Alex

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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