Bear Market Blues? Buy Kraft Heinz Stock Now

Many stocks have been crushed this year as inflation, rising interest rates, and other macroeconomic headwinds have driven investors toward safer investments. The Nasdaq Composite entered a bear market this March, and the S&P 500 Index followed it into the same den in June.

Faced with the prospects of even steeper declines in the second half of the year, many investors might be reluctant to buy more stocks. Furthermore, the ongoing rotation from growth to value stocks has also inflated the valuations of many blue-chip stalwarts to unattractive levels.

Image source: Getty Images.

However, inflation also makes sitting on cash a bad idea. So instead of shunning all stocks, investors should still focus on the underappreciated bear market plays that still trade at low valuations. One stock that fits that profile is the packaged foods giant Kraft Heinz (KHC -0.52%), which has been struggling to turn around its business over the past few years.

What happened to Kraft Heinz?

Kraft Heinz emerged from the merger of Kraft and Heinz in 2015. As a new company, it initially focused heavily on cutting costs instead of acquiring higher-growth brands or investing in new marketing campaigns.

That cost-conscious strategy caused it to lose consumers to healthier, local, and private-label brands in the supermarket aisle. It slashed its prices to stay competitive, but that strategy merely squeezed its gross margins without meaningfully boosting its organic sales.

In Feb. 2019, Kraft blindsided its investors with a $15 billion writedown on its top brands. a dividend cut, and the disclosure of an SEC probe related to its accounting practices. A few months later, CEO Bernardo Hees resigned and handed the reins over to Miguel Patricio, the former chief marketing officer of Anheuser-Busch InBev.

How did Patricio address Kraft's biggest problems?

Kraft Heinz's stock traded at $31 per share on Patricio's first day, which was well below its all-time high of $96.65 in February 2017. But as of this writing, it trades at about $39 per share and has advanced about 8% this year.

Under Patricio's watch, Kraft launched fresh marketing initiatives for its classic brands. It also divested its weaker brands -- including a large part of its cheese portfolio (including Polly O and Cheez Whiz's overseas business) and its nuts business (including Planters) -- while acquiring growing brands like the Brazilian condiment maker Hemmer and a majority stake in the German spices and seasoning maker Just Spices. That optimization of its product portfolio, which still includes dozens of other brands (including eight $1 billion brands), gradually stabilized its organic sales growth.

The pandemic also generated tailwinds for Kraft throughout most of 2020 as shoppers stocked up on packaged foods. That unexpected growth spurt enabled Kraft to accelerate its turnaround efforts while reducing its long-term debt from $28.2 billion in 2019 to $21.1 billion in 2021.

Lastly, Kraft launched an ambitious new long-term strategy in late 2020, which was aimed at cutting its costs by $2 billion over the following five years to generate 4%-6% adjusted earnings growth annually. That rosy outlook convinced many investors that Kraft Heinz's stock had finally bottomed out.

It should overcome its near-term challenges

Kraft's sales growth cooled and its gross margin declined in 2021 as it lapped the pandemic and faced inflationary headwinds, but its cost-cutting measures continued to boost its operating margins and adjusted EPS.

Data source: Kraft Heinz. YOY = Year over year.

In Kraft's first-quarter earnings report in April, it predicted its organic sales would rise by a "mid-single-digit" percentage for the full year, but that its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) would still dip 6%-9% as it grappled with higher costs.

Like its industry peer General Mills (GIS -0.32%), Kraft is mitigating some of that pressure with price hikes. Analysts expect Kraft's adjusted EPS to decline 8% this year, but rebound 3% in 2023 as those headwinds wane.

Patricio said Kraft was "effectively managing our inflation, improving our supply constraints, while continuing to gain incremental efficiencies" during its latest conference call. CFO Andre Maciel also predicted that inflation would eventually plateau, and that Kraft's gross margins will "recover as costs stabilize and the price realization comes through."

A low valuation and a high dividend

Kraft's growth rates will likely remain anemic this year, but it's the type of slow-growth defensive stock that holds up well during brutal bear markets.

The stock trades at 14 times forward earnings and pays an attractive forward dividend yield of 4.1%. By comparison, General Mills trades at 19 times forward earnings and pays a low forward yield of 2.9%.

Kraft's low valuation and high yield should limit its downside in this volatile market, and it should remain a rock-solid investment if a recession starts.