Even iconic investors make mistakes. Warren Buffett sure made one when he bought a quarter of Kraft Heinz. The damage is up to $14 billion and this may be far from over.
Warren Buffett is without a doubt one of the most legendary investors of all time. Few investors can claim to be such a household name as Buffett can, and also lay claim to being the world’s richest person for a time.
You don’t make it all the way to being worth $84 billion by making a lot of bad decisions, and Warren Buffett is rather famous for his wise investments he has made over a career that now is in its seventh decade. Not all his investments worked out though, and the stake he bought in Kraft Heinz was certainly one that has fallen on its face.
Mr. Buffett is also famous for being very committed to his buy and hold strategy, and while it isn’t that he doesn’t flinch and retrace his steps from time to time, his hanging on to his over a quarter stake in Kraft Heinz through all the turmoil that this stock has gone through over the past two years is testimony to that.
Kraft Heinz Loses 28% in One Day
Kraft and Heinz, two household names themselves, merged in 2015, and Buffett had a lot to do with the merger, letting his money talk to get the deal done. The new company didn’t start out in trouble, and by February 2017 the stock had moved up from its starting price of $77.31 in 2015 to a high of $96.65 a share. Then things started to unravel.
The next two years were not particularly kind to this company, and by Christmas Eve 2018, the stock’s price had plummeted all the way to $43.57 a share, almost exactly half where the price had been less than two years ago. The market rally of the last 2 months did help Kraft Heinz at least a bit, seeing it wiggle its way back up to $48.18 at the closing bell Thursday, just before the company was about to announce its quarterly results.
At the end of trading Friday, the stock had dropped all the way down to $34.95 a share, shattering the December low and giving up 28% of its value in a single trading day. The earnings report from the night before was simply terrible, and the market showed them no mercy.
Warren Buffett’s Berkshire Hatheway happens to own 325,634,818 shares in Kraft Heinz, so a drop in the stock of $13.23 a share adds up to a total one-day loss of over $4.3 billion from Berkshire Hathaway’s stake in the company.
As big as this amount is, and $4.3 billion is a lot of money no matter how much you have, the cumulative losses from this company that Berkshire Hathaway has endured so far is even more gruesome. Since the company was formed, its stock has plummeted a total of $42.36 per share, and when we multiply that by the number of shares that Berkshire Hathaway owns, that cashes out to a total loss of $13.79 billion so far.
The Kraft Heinz stake only amounts to about 8% of Berkshire Hathaway’s holdings, but this relatively small portion has been like a black hole sucking the company’s equity. You don’t see almost $14 billion disappear and not be affected significantly, even if you are as big as Berkshire Hathaway is, and they are plenty big indeed,
While you can’t just move over 325 million shares of a company at the drop of a hat, Buffett has remained firm in his commitment and has held fast throughout all this ugliness. Friday’s developments are of a different magnitude, at least on the Richter scale, and the ground beneath the marriage of these two venerable and classic American companies sure shook mightily on this day,
This all happened in the midst of a pretty nice rally, where the Dow moving up by 0.70%, the S&P 500 adding 0.64%, and the Nasdaq leaping by 0.91%. When such grim news as Kraft Heinz just saw hits the market, it is no longer about where the market is going, when the price buyers are willing to pay for this stock fall off a cliff like this.
Where Does Buffett Go from Here?
We have to wonder just how committed Buffett is to this company, not just from the mighty fall that they have gone through, including falling right on its face Friday, but from the grim short-term outlook that the company has provided us.
According to the company, 2019 will be even worse, which is not what investors wanted to hear after such a big miss. There’s also the massive write-down of $15.4 billion, not due to a one-off circumstance, but directly related to the deteriorating value of some of the company’s offerings, affecting both the Kraft and Oscar Mayer brands.
The fact that these brands are worth over $15 billion less is startling, and while other companies do use impairment charges for accounting purposes, this is a mega impairment charge involving a pretty massive impairment.
There’s also the issue of the company being investigated by the Securities and Exchange Commission, never a pleasant thing, and while this one may not end up being that significant to the company’s bottom line, it is doing nothing to add confidence in the company.
The best we can hope for here, according to the company, is a better 2020, but that is far off enough that whatever more optimistic projections that we are given here is bound to be subject to revision.
Warren Buffett is considered to be the king of the buy and hold strategy, and his vision with this one may be years down the road, but Kraft Heinz has done little to inspire such confidence, to the point where we might wonder what he sees in this stock. Buying and holding mean ignoring the charts, but this is one that is so ugly that even the King might be starting to have second thoughts, and when we throw in the terrible outlook for 2019 at least, this very well might be where the man and the strategy part ways, at least somewhat.
There’s nothing like the bottom line of your own company to reshape your thinking though, the one you’ve nursed since 1962, and the big company is going to take a hit on this one as well. Barclays has cut their earnings projection for Berkshire Hathaway Class B by more than half as a result of this development, from $2.35 a share all the way down to $1.15, which has to hurt not only Buffett but his army of loyal investors.
On the other hand, Buffett loves value, so perhaps he sees Kraft Heinz sitting in the area of $35 per share a good long-term value. There’s no need to buy in here though when you already own so much.
We might not have seen the bottom here though and the next few weeks will tell us just how many more people are scared. Mr. Buffett is probably not one of them though, right now anyway, as he’s probably not too eager to dump a lot of these shares on the market right now and drive the price down even further, dog or no dog.