Buffett Hanging on With Kraft Heinz, What Should We Do?

Warren Buffett

Kraft Heinz has taken such a pounding that some people wondered whether Warren Buffett would seek to reduce or eliminate his position. Warren doesn’t give up this easily.

More than a few investors follow investing icon Warren Buffett, especially given that he has made enough good investments to propel him to a personal net worth of over $80 billion. They may know little or nothing about investing, and following this legend’s investments and trying to be more like Warren does have quite a bit of appeal to many.

Not everything Mr. Buffett touches turns to gold, and his success is not due to his having some sort of magical insight, but instead has been founded on hard work and patience.

His deal in acquiring a big piece of Kraft Heinz after getting the two food companies to merge sure doesn’t look like one of the good ones. Even if this story has a fairy tale ending, he still could have waited and got in at a better time than he did, and avoided the bloodshed that has plagued this stock over the last couple of years.

While some may have expected Buffett to bail after the stock took a big hit last week, shedding a third of its value and costing Buffett billions, it simply would not have made sense for him to get out now. It’s not because he’s got so much invested in the company to give up, it’s a matter of what the price would be if he did sell.

Buffett owns a huge stake in this company, so his selling would drive the company’s stock down much further, not to mention all the additional selling that his making a move like this would bring along with it, given that he’s seen as a sort of oracle. When Warren bails, it’s certainly time for us to go as well, especially since he is one of the most patient investors in the world.

Whenever we are contemplating selling an investment, the last thing we want to be looking at is how much we are down. Sure, Buffett has lost a lot of money so far with this, but that’s gone now, and this is a time to collect ourselves and consider the value of this stock relative to its current price, not some past one.

Kraft Heinz Stock Just Got More Attractive Long-Term

Kraft Heinz actually may be more attractive now than it’s been in a long time, due to the big fall that it has taken. This may require that we be patient with it, although even those who are only looking to hold it for a briefer amount of time may still be enticed by its being sold off so much lately.

After falling from $48.18 per share last Thursday all the way to $33.19 the next day, and dropping further to $32.20 on Wednesday, we actually had a positive day with this stock on Thursday, closing at $33.19, a healthy 3% gain over the previous day.

This at least hints that the selling frenzy may be coming to an end, or at least playing itself out such that those who are seeing more value in this stock at these current levels are gaining the upper hand, if just for a day.

Thursday was a down day for the markets, so it’s not as if Kraft Heinz was riding the coattails of a market advance, therefore its positive performance Thursday can be viewed as even more meaningful.

This does not mean though that the worst is necessarily over, but when a stock is in a free fall, the end of the main fall is at least a point where we want to take account of. However, given the company’s gloomy outlook for 2019, it would not be much of a surprise to see it languish in the low 30’s or worse for quite some time.

The value in this stock at present is the prospects of this earnings report having it oversold, meaning that it has become more valuable by seeing its price overshoot what it may have gone to if not for the selling frenzy.

Stocks often will make price moves that are in excess of what we could consider fair value at the time, and when they do extend themselves too much either on the upside or the downside, we usually see a reversion to the mean, where conditions come back to this more appropriate level once we root out the emotionally driven trades.

The Edgy People Have Now Left the Building

Whether some investors just exceeded their pain tolerance, whether they sold out of fear of worse, whether they just decided to wash their hands of this dog, or whatever the reason, these investors have had plenty of time to act, and we can therefore assume that further action will be of a more deliberate nature, which may include the stock coming back at least a little from this recent bottom.

If we are holding a position in Kraft Heinz and aren’t among the many who have tossed their shares, we may indeed wish to follow Mr. Buffett’s lead and hold fast to it, even though our exiting would not bring down the stock in the way that Warren’s selling out would, and involve losses to him well in excess of what he’s already endured.

This earnings call wasn’t completely bad news, and the company is at least expecting brighter skies in 2020, although whether that happens or not may be another matter. If our time frame is on the longer side like Buffett’s is, keeping this stock to see what pans out then and beyond may not be a terrible idea at all.

If we’re more aggressive, we may even consider buying Kraft Heinz down here, as a distressed play. The company isn’t all that distressed but the stock has certainly taken a real beating, and having the fear beat out of a stock and seeing all of the impatient and fearful players leave the room does provide for more stability generally.

While some traders will be looking to capitalize on this rebound, this strategy isn’t about that, it’s about doing what Buffett will be doing, expecting that in time we may make it back at least over the $48 a share level we were at just a week ago, and perhaps beyond.

This is not some new company, and although we want to be careful with any stock, including ones involving such iconic brands as Kraft and Heinz, these companies go all the way back to the dawn of the stock market, and have endured and survived much over these years.

The most important thing to realize by far here is that whatever we may have lost on this does not matter and cannot be taken into account in any way. If we want to dance with this company, we need to realize that the dance begins anew now and we need to set aside what has happened and ensure that we’re focused not on where we have been, but where we may be going.


Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: robert@marketreview.com

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