For most people, it’s easier to follow a crowd than to go against what everyone else is doing. This is why certain stocks tend to trade in one direction (usually up) for an extended period of time, depending on how enthusiastic the investment community as a whole is feeling at any given time. For Costco wholesale (COST 1.00%)This follow-the-crowd mentality has worked well for several years now. Public enthusiasm has helped the stock outperform the broader stock market, returning 222% over the past five years (compared to 102% for the stock market). S&P500).

It is in cases like this that contrarian investment sometimes comes into play. A contrarian investor looks for opportunities where the popularity of an investment choice in the broader market has led people to significantly undervalue certain other securities. This could be a great time for contrarian investors to consider buying Hershey (HSY -0.14%). Here’s why.

The air gets thinner around Costco

Costco has an excellent reputation as one of the best retail companies in the world, and rightfully so. The company has a cult following among some of its members and is known for its wide selection and low prices in its stores. Customers must pay a membership fee to shop at its stores, which is how Costco achieves most of its profits.

Good businesses don’t come up for sale often, and Costco is no exception. Over the past decade, the stock has traded at an average level price/earnings ratio (P/E) of 35, a considerable premium to the market as a whole. Yet the stock continues to generate exceptional investment returns.

But as you can see below, Costco’s 2024 valuation has broken through the glass ceiling and is stuck in the clouds:

PE COST Ratio data by Y Charts

As great as Costco is, it will likely revert to the mean at some point and potentially drag the stock price down. Costco’s profits are only expected to grow about 9% annually over the long term. It will be difficult to justify such a high valuation without more growth.

Hershey is a struggling millionaire maker stock

Hershey is an entirely different company from Costco (although many Hershey products are sold in Costco stores. The company is one of the leading candy companies in the United States, with beloved brands like Hershey’s, Reese’s, Twizzlers , KitKat, Jolly Rancher, and more The company has also expanded into the snack segment and now owns popcorn and pretzel brands like Pirate’s Booty, SkinnyPop, and Dot’s.

The power of the brand has allowed Hershey to generate strong return on invested capital (ROIC)an average of more than 17% over the past three decades, and this trend has slowly increased over time. You won’t mistake Hershey for a growth stock, but its steady growth is enough because the company has a very high return on investment. Hershey is a cash cow that can simultaneously repurchase stock, pay and raise a dividend, and develop and acquire new products.

The result? Generational wealth. Hershey has returned nearly 44,000% over the past five decades, making the company a veritable millionaire for long-term shareholders.

Unfortunately, the company is currently facing serious adversity. Cocoa beans are a fundamental ingredient in chocolate. Bad weather and disease have decimated cocoa harvests over the past 18 months, driving commodity prices to unprecedented levels. This forced companies like Hershey’s to raise prices to try to offset some of the added costs, which, in turn, hurt sales.

Hershey was growing profits 8% to 10% a year, but the cocoa farming disruption stifled its growth estimates and destroyed confidence in the stock:

HSY EPS LT Growth Estimates data by Y Charts

Why now might be the time to buy

Hershey has been beaten so badly that its shares are giving off rarely seen valuation signals. Its dividend yield reached 3% for only the third time. The stock has averaged a P/E ratio of 25 over its lifespan, but today trades at around 20 times earnings. Remember, Hershey’s business is struggling, so profits are probably somewhat depressed. The last time Hershey’s dividend yield was this high, the stock traded near a P/E of 18, which has only happened a few times in the last quarter century: