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Kraft-Heinz: Ketchup With Butterwire

Raphael Fiorentino
Raphael Fiorentino
23rd February 2019 - 2 min read

Broken Ketchup

Shock and Awe in the seemingly “safe, boring and high-yielding” world of Western Consumer Staples last week: as the S&P500 gained 0.6%, Kraft-Heinz lost 26.6% of its market value, thanks to a dividend drool followed by a big squirt of asset write-downs.

Ever since Butterwire’s iGDP (a proprietary measure that gauges the global growth priced in by financial markets at any given time and is an important indicator of likely future equity returns) dipped below 2% back in 5-Jul-2018, Butterwire’s engine has been favouring stocks with high recession-resilience scores. And since the start of the year its country model has featured the USA as one of its favourite to be exposed to (within developed markets).

So let’s imagine a retail investor who last week-end turned to Butterwire’s Stock Explorer feature in search of “relatively safe” ideas in the US, specifically, 5-10 large-cap stock ideas to choose from in the consumer staples sector. Unfortunately there was only one such candidate singled out by the engine as "interesting" (Estee Lauder, up +2.6% last week), and so let's broaden the scope to include any US Staples stock that is “non-controversial” (say, controversy score under 3 out of 10) and has “low sensitivity to swings in market returns” (market beta under 0.7). As of 15-Feb, the Explorer would have shown 9 names meeting the criteria. While none of them were seen by the engine as outright “interesting” (largely due to their being so non-controversial, as a lack of apparent controversy is associated by the engine as reducing upside risk and increasing downside risk), P&G (+1.7% last week) ranked first and Kraft-Heinz last (see screenshot below).

Explorer

A quick look at Kraft-Heinz's abridged stock scores revealed extremely poor fundamentals (base score of 0.6 / 10) and recession resilience (recession score of 1.7 / 10 versus at least 6.4 for all the others). And as if this weren’t enough, a red flag and an “Exit?” alert completed this high-level view – the red dot next to the stock name is the red flag, which denotes a very poor trailing performance coupled with deteriorating fundamentals and which points to heightened chances of a blow-up; as for the red triangle, it alerts holders of the stocks to consider selling out of it entirely. Clicking on the stock name would have revealed a more detailed analysis and revealed among other things KHC’s poor financial fitness (especially a high level of non-debt long-term liabilities) and fundamental momentum (especially downward revisions in consensus earnings). In other words, anyone considering buying or holding KHC last week would have had a vast array of signals from the app warning about the relatively poor odds on offer.

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