The Kraft Heinz Company's (KHC) troubles began in 2016, well before the COVID-19 pandemic, with a botched merger between equals, high debt levels, and a poorly managed reorganization plan contributing to a brutal downtrend that has dropped the food giant to an all-time low. Indeed, the virus has just made a bad situation even worse, knocking an additional 30% off the stock's value since February.
However, market players have ignored the company's most attractive attribute since the crisis began. Simply stated, this is a food stock at a time when anxious shoppers are loading up on canned goods and other staples that form the vast majority of the company's product line. Just look at Hormel Foods Corporation (HRL) and Campbell Soup Company (CPB), which have outperformed broad benchmarks in the past two months, and it won't take much imagination to see that Kraft is likely to beat quarterly estimates.
Recent comments from CEO Miguel Patricio underpin this bullish scenario, telling CNBC that some factories are now working three shifts per day to meet extraordinary demand. The executive also noted that the company has drawn down its $4 billion revolving credit line as a precaution, but this investment could pay off, with additional workers ramping up much needed revenues and profits. In the meantime, the stock pays a hefty 7.18% forward dividend yield.
Even so, this is a high-risk trading call because we can't rule out a forced liquidation event in which investors have to sell everything in order to meet margin calls. That type of worst-case scenario would affect nearly 100% of equities that fill a typical retail portfolio in 2020, including all the cheap bottom fishing plays that more aggressive market players have been jumping on this month.
KHC Long-Term Chart (2012 – 2020)
Kraft Foods spun off food and beverage operations into Mondelēz International, Inc. (MDLZ) and Kraft Foods Group in September 2012. The common stock for this entity came public at $35.42 and eased into a narrow trading range, with support in the lower $30s and resistance in the upper $30s. It broke out in the first quarter of 2013, entering an uptrend that stalled in the upper $40s a few months later.
The rally made little progress above that resistance level until March 25, 2015, when the Kraft-Heinz merger announcement triggered a 15-point rally gap into the low $70s. Price action hovered around that level for more than a year, consolidating gains while awaiting government approvals. The stock turned higher once again in May 2016, carving a two-legged advance into February 2017's all-time high at $97.77.
Selling pressure escalated in the first quarter of 2018, carving a series of lower highs and lower lows. The stock broke 2012 support in February 2019, posting new historical lows into August 2019, when it bounced at $24.86. That uptick failed in the mid-$30s in November, yielding a shallow but persistent decline that broke 2019 support on March 11. It has bounced once again after posting an all-time low at $19.99, but willing buyers still haven't come to the rescue.
KHC Short-Term Outlook
The weekly stochastic oscillator entered the oversold zone in January 2020 and crossed into a buy cycle in early March, predicting six to twelve weeks of relative strength. The breakdown through the 2019 low marks the first resistance on a bounce, with the stock trading less than two points below that level on Monday. However, there's little to gain in catching this falling knife until it remounts that level and tests it successfully.
The Bottom Line
Kraft Heinz could post much higher-than-expected profits and revenues in the first quarter, potentially ending the stock's four-year downtrend.
Disclosure: The author held Campbell Soup in a family account at the time of publication.