Why Hershey's May Deliver a Sweet Surprise This Earnings Season As investors look forward to the second quarter earnings season, they should take a close look at The Hershey Company. The company's latest quarterly results shows that it is retaining...

Here's why the confectioner deserves a place on your bear market watchlist

As investors look forward to the second-quarter earnings season, they should take a close look at The Hershey Company (NYSE: HSY). The company may deliver a pleasant surprise when it reports earnings in early August. The first reason for my optimism is the recent news that a federal judge in Washington D.C. dismissed a child slavery lawsuit in which Hershey's was named as a defendant.

Putting that story behind it can give investors an opportunity to focus on the second piece of news that may be more immediately accretive to their bottom line. Earlier this year, the company announced a 14% weighted average price increase. This includes a 17% increase on its iconic Hershey bars and 13% hike on the king size version of its products.

A Hedge Against Inflation

The playbook for investing in this bear market can be as simple as finding companies that have pricing power. These are the companies that are likely to continue to post solid revenue and earnings no matter how muddled the macroeconomic picture looks. Based on the company's earnings report in April, it's having no problems passing along prices to its customers.

In its most recent quarter, the company posted a 16% year-over-year (YOY) increase in revenue and a 31% YOY increase in earnings. And for the trailing 12 months, the company has delivered an 18% YOY increase in earnings.

The Fundamentals Look Solid

The company also generated an impressive 28% YOY increase in free cash flow (FCF) between 2020 and 2021. And the $1.59 billion of FCF the company posted in 2021 exceeded the pre-pandemic year of 2019 by 10%.

With both revenue and earnings projected to rise steadily over the next five years, the company should continue to generate strong free cash flow that should alleviate any concerns that some investors have over the company's debt ratio which is a bit high compared to other companies in the sector.

And while there are better options available for pure dividend investors, the fact the company's strong cash position means that its current dividend (which has increased for 13 consecutive years) is not in jeopardy.

A Sweet 5-Year Trend

HSY stock has shown strong five-year growth. If an investor bought shares on June 28, 2017 they've received share price growth of 104%. And their total return will be higher if they've reinvested the company's dividend which Hershey's has increased in each of the last 13 years.

And for the "what have you done for me lately" crowd, there are two bits of good news. In the last 12 months, HSY stock is up 27%. And in 2022, the stock is up 13.6%. And even in the volatile period in equities since Memorial Day, Hershey's stock is up 4%.

This is showing that Hershey's has a story that goes beyond just being a pandemic winner. Consumers are still finding comfort in the company's products. And that is likely to continue in the second half of the year which features two of the company's strongest periods of demand.

What to Do With HSY Stock

In a bear market, it's important to see the forest through the trees. It's not a time to be indiscriminately buying. But if you're looking for quality companies that have pricing power and products that will be in demand, you're going to do fine.

With that said, the analysts tracked by MarketBeat suggest that the HSY stock price has topped out. However, the most recent price targets are above the consensus. The expectation is that analysts will be lowering their price targets and ratings during this earnings season. That may be true, but if Hershey's continues to deliver strong results, the stock may be difficult to ignore.

I'll admit to sleeping on Hershey's stock, but I'm wide awake now. It's on my watchlist and I'm suggesting that you keep it on yours. In a sour market, we could all use a taste of something sweet.