There is a rather gruesome saying when it comes to investing:
“The time to buy is when there’s blood in the streets.”
The adage is contrarian at heart, and credited to Baron Rothschild, an 18th century British nobleman who made a fortune off literal blood in the streets in the panic following the Battle of Waterloo.
While I certainly don’t condone violence, I’m sure there are more than a few Kraft Heinz Company (NYSE: KHC) investors seething right now.
Recapping the situation, Kraft Heinz recently disclosed a federal investigation into its procurement operations. The company received a subpoena from the Securities & Exchange Commission (SEC) back in October. It was those same operations that prompted a $15.4 billion write-down in Kraft Heinz’s fourth-quarter earnings report.
But this pain could be your gain.
Kraft Heinz sells some of the U.S.’s most iconic brands: Heinz ketchup, Oscar Mayer hot dogs, Kool-Aid, Kraft cheese, Jell-O, etc. In fact, you’d be hard-pressed to find any American cookout or family gathering that didn’t include multiple brands listed above.
In short, Kraft Heinz isn’t going away anytime soon.
Like most of the market back in October, KHC stock was overvalued and a drop was long overdue. Kraft’s fourth-quarter earnings helped speed that correction along, and Friday’s post-SEC plunge now has KHC trading at multi-year lows.
All of the woes listed above are now priced into the stock. In fact, KHC could be quite a value play given that the market has likely overreacted to the SEC investigation.
The best evidence of this comes directly from Warren Buffett. Despite the plunge, Buffett recently told the Wall Street Journal that he has no intention of selling his KHC holdings.
Buffett owns 27 percent of Kraft Heinz. And, while he has admitted to overpaying for his stake, which he acquired back in 2015, “We don’t pull the plug.”
Buffett continued, “It’s still a wonderful business in that it uses about $7 billion of tangible assets and earns $6 billion pretax.”
KHC stock is now trading well below what Buffett paid for his stake. In fact, the stock is trading below book value and below 10x forward earnings. KHC shares are screaming “value trade” right now.
That said, investors will have to put their emotions aside on this one. KHC stock is not out of the fire yet, and more short-term losses could be on the way. For one, the shares could stay repressed until the SEC investigation is settled.
Furthermore, the company is dealing with a shift in American consumer habits away from processed foods and toward fresher and organic ingredients. But the company has more than enough clout to deal with this shift — it will just take time.
Kraft Heinz’s products aren’t going to leave family barbecues or picnics anytime soon, making now a potentially profitable time to go bargain hunting.