Donald Yacktman once said that investors make serious money when there is a mismatch between an investor’s assumptions about the future of the company and the expectations of the general investor community at large. A lot of times, this shows up in the P/E ratio of the stock. Take Hershey for example. It is aggressively raising prices by 8% in a typical market, and volumes are still growing 3%, 4%, or 5%, depending on whether you use trailing, current, or short-term future expectations to make your projections. All in all, it is working its way through a high point of a cycle where profits could be growing around 12% per year during the 2016, 2017, 2018, and 2019 period.
The problem? The current P/E ratio of the stock already reflects this better-than-usual business performance because Hershey usually trades at 20x earnings but now trades at 27x earnings. That jump of … Read the rest of this article!