You’ve probably heard the saying, “one man’s trash is another man’s treasure.”
Well, in this case, one man’s loss is another man’s gain – and the losing man is one of the richest in the world, Warren Buffett.
The billionaire investor has a pretty significant stake in Kraft-Heinz Company (NASDAQ: KHC), the third-largest food and beverage company in the world. But right now, KHC has a number of factors working against it.
And on Monday, that number grew by one more.
The food company’s latest obstacle could be the one to finally tip the stock on its head, dumping out investors’ wallets – like Warren Buffet’s – on its way down.
But there’s a way to turn the shake-down into your next profit. Here’s how…
How to Bank a Triple-Digit Profit off Kraft-Heinz’s Fast Fall
It’s been a rough year for Kraft-Heinz Company (NASDAQ: KHC).
The food and beverage company is currently under investigation by the U.S. Securities and Exchange Commission (SEC) after employees lied about previous earnings numbers. The CEO resigned, and the company has had to restate every earnings report since 2016 – the latest of which did nothing to help the weakening business.
Earnings results from the first half of 2019 hit the market last Thursday, August 8 before market open. And while the earnings themselves beat forecasts, revenue did not.
Sales dropped almost 5% from the previous year, and profits were down over 50%. As expected, the stock reacted. Shares plunged 15% in early-hours trading to a new all-time low, marking KHC the worst performer in the S&P 500.
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KHC has made more than a few mistakes that brought the company to the bottom of the food chain – pun intended. One of them is putting too much focus on cost-cutting and not enough on creating new products.
Consumers are increasingly turning toward healthier food products. That much is evident in the market, especially when you look at the rapid success of plant-based provider Beyond Meat Inc. (NASDAQ: BYND).
But when you put KHC‘s products into view, you don’t get organic, health-conscious options. Instead, you get things like Velveeta cheese, Miracle Whip, and Kool-Aid. Sure, you may have grown up on these foods. I know I did. But nowadays, parents want their kids snacking on organic fruit bars and kale chips. Your grandkids’ lunchboxes probably won’t be stocked with the same things yours was – consumer interests are changing. And KHC is struggling to keep up.
And people, or rather, agencies, are beginning to notice.
On Monday, top credit ratings agency Fitch warned that if KHC doesn’t pick up the pace, then the company’s bonds could be downgraded to junk – which would be catastrophic for the stock. You see, low credit ratings cause interest expenses to rise for companies in debt. And KHC, albeit unsurprisingly, is upwards of $30 billion in debt.
Fitch already rates shares at the lowest level still in investment grade. And it isn’t the only one. Both Moody’s and Standard and Poor’s have the stock rated just one level above junk status, making for all three major agencies.
A junk rating could be the straw that breaks KHC’s back. But it could also be the one to make your wallet. By purchasing a put option, you can profit while the stock drops.
Let’s look at an example. On July 29, 2019, Nucor Corporation (NYSE: NUE) was trading around $55.90. And the stock appeared ready to drop, so my Money Calendar Pro readers bought a put option.
Just eight days later, on August 6, NUE had dropped to $50.93. So, we sold our puts. And that 9% drop handed us a whopping 193.18% profit.
Now, KHC has already dropped 40% this year, and the future doesn’t look bright for the stock. Even Warren Buffett himself has admitted paying too much for his 27% stake in the company:
“I’ve paid too much for a lot of things. Time usually works it out, but it means that capital could have been better deployed in other areas. You can always pay too much for a business.”
The stock’s latest drop has wiped out over $5 billion of Buffett’s stake – and now, it’s your turn to make money off the Oracle of Omaha’s loss.
But remember – this is just another example of how quickly a company’s stock price can sour, especially once the ratings agencies start cracking their whips.
As a whole, the market is becoming increasingly volatile – and we need to be more than ready for anything that could come our way.
That’s why we need to not only insure our stocks with puts, but also to be using a system that can make us money when the market takes a turn.
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Good trading,
Tom Gentile
America’s #1 Pattern Trader
