The Motley Fool

Candy Lovers: You Want to Own This Stock

One of the weaknesses of the TSX is the lack of interesting names outside the energy and financial sectors. It’s a big reason I personally invest a majority of my portfolio outside Canada. There’s just so many more options.

Here’s a classic example.

I walked into Dollarama Inc (TSX:DOL) the other day for the sole purpose of buying some candy, so I could break a $20 dollar bill to get some change for the subway. Now, don’t get me wrong, I love candy a lot, probably too much for a man my age, but on this occasion, I was there for change.

Anyway, one of the items I bought was Mike and Ike, a chewy, fruity candy made by Just Born Inc., a Pennsylvania-based, privately held business that’s the ninth-largest candy company in the U.S. I’ve loved their products for years. Unfortunately, it’s been owned by the same family since its start in 1923 and isn’t publicly traded.

As I walked out of the store, I started to think about candy companies that are publicly traded; two quickly came to mind: Hershey Co (NYSE:HSY) and Tootsie Roll Industries, Inc. (NYSE:TR). Both are U.S. companies. Always trying to find the next great stock, I wondered about Canadian options, but came up empty.

I then thought about the price I’d paid at Dollarama for my Mike and Ikes, but by then my receipt was in the recycling bin. So, the next time I walked by I made a point of buying another pack of Mike and Ikes to find out the price of a 141-gram package.

At first, I thought I’d paid $2 for the pack of candy–50 cents higher than the price at Shoppers Drug Mart and most grocery stores. Indignant, I began to reconsider my recent argument for buying Dollarama stock despite its nosebleed valuation. I was irked.

That soon changed to elation when I walked up to the cash, plunked down my package of Mike and Ikes, and the cashier said, “$1 plus HST, please.” I’d gone from paying 50 cents too much to 50 cents less in the blink of an eye.

As a candy lover, that’s great news.

Now, I’ll grant you that Dollarama doesn’t have the selection that high-end candy stores in the U.S. have, like Dylan’s Candy Bar or Lolli and Pops do, but you’re not going to pay an arm and a leg for it either.

What exactly does this have to do with investing in Dollarama?

Inflation protection.

Mike and Ike packages used to weigh 170 grams, but, due to inflation, they reduced the number of candies in the package by 20%. If you buy potato chips, you know what I mean.

Now think of the economics for Dollarama. It’s a dollar store. Although it has prices on individual products as high as $4, customers are still looking for those $1 purchases. Eliminate these, and you risk losing some of your customers.

So, Mike and Ike packaging gets smaller, allowing Dollarama to fit more boxes on its shelves, while keeping customers happy by maintaining lower prices.

The net result is greater revenue–a big reason why this candy lover likes Dollarama stock.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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