Will Kraft Heinz Stock Bottom Out After Earnings?

The Kraft Heinz Company (KHC) reports second quarter earnings in Wednesday's pre-market, with analysts expecting earnings per share (EPS) of $0.61 on revenue of $6.1 billion. The battered and bruised food giant didn't file mandated Securities and Exchange Commission (SEC) reports in the first quarter due to an internal investigation that ended with a June filing for fiscal year 2018. Along with the filing, the company alleged that prior misstatements were not "quantitatively material" and now expects to file the first quarter report on or before July 31.

The stock has been pummeled for two years, with steep losses arising from a botched merger between H.J. Heinz Corp. and Kraft Foods Group. In 2018, the company received a subpoena from the SEC focused on its accounting practices, which became the catalyst for 2019's late filings and renewed shareholder exodus. Sadly, Kraft Heinz has done everything in its power to make a bad situation worse this year, refusing to sell unprofitable brands or expand into new opportunities. 

The stock jumped around 3% after the June filing and has been running in place less than five points above the all-time low in the $20s, posted on May 31. Ominously, the SEC investigation is still active, and the commission hasn't signed off on the annual report yet. The U.S. Attorney General's Office for the Northern District of Illinois is also reviewing legal and accounting paperwork, heightening the threat of civil or criminal litigation in the coming months.

Bottom fishers are licking their chops, hoping to own cheap shares of a well-established and old-school food conglomerate, but buying at this juncture carries extremely high risk, despite the 63% two-year decline. For starters, the stock hasn't held the 50-day exponential moving average (EMA) for more than a few weeks since April 2017, highlighting the severity of the downtrend while identifying a price level that should be watched closely after this week's confessional.

In addition, Kraft Heinz stock gapped down 13 points when the SEC investigation was disclosed in February, generating a potentially massive barrier of aggressive sellers between the upper $40s and mid-$30s. The bottom of the big hole is situated just four points above this morning's opening print, signaling limited upside even if the news triggers a short squeeze or bottom fishing expedition.

KHC Monthly Chart (2015 – 2019)

The stock opened in the low $70s after the merger was completed in June 2015 and entered an immediate uptrend that posted an all-time high at $97.77 in February 2017. It completed a topping pattern a few months later and broke support near $80, entering a steep downtrend that accelerated in the first quarter of 2018. An April bounce starting in the mid-$50s made little headway, stalling in the mid-$60s, ahead of renewed selling pressure that yielded another minor uptick in January 2019.

The disclosure triggered a brutal three-day decline that posted the highest volume in the stock's four-year history, highlighting a shareholder panic that bulls hope will eventually signal a long-term bottom. However, accumulation-distribution readings have barely budged since that event, indicating that sidelined investors are sitting on their hands while the company works through dangerous legal and accounting issues.

The monthly stochastic oscillator entered a long-term buy cycle in October 2017 that failed in January 2018, ahead of a similar failure over the summer months. The stock has now lifted out of the oversold zone for the third time in 20 months, trying to jump-start a new uptrend. Watch the indicator closely if bulls take control after the news, keeping in mind that it will take several weeks of sustained buying interest to lift the indicator above the 2017 and 2018 failed peaks.

The Bottom Line

It's hard to recommend buying Kraft Heinz shares despite massive losses since 2017, with government investigations, accounting issues, and a broken price chart likely keeping a lid on the upside.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.