Stock markets rise and fall over time. It's just how the markets work. But just as predictable as the pendulum swing from bull to bear (and vice versa) is, so too are the emotional swings that investors go through. Right now, investors are clearly selling assets, but they are also looking for a new home for the cash that's raised. One beneficiary has been high-yielding Kraft Heinz (KHC +2.23%). Is that the right place to run for cover?
The baby and the bathwater
When stock markets fall beyond key yardsticks, investors start to worry. The first big one is a so-called "correction," which simply means that an index -- in this case, the Nasdaq Composite -- has declined by 10% from its highs. Corrections aren't unusual at all, but they are clearly the first stop on the way to a bear market (a decline of 20% or more). Therefore, fear has started to rise in people's hearts and minds.
Image source: Getty Images.
That sets off two very specific events. First, investors start to sell assets in an effort to protect themselves from potential losses. Often, the first stocks to go are the stocks of companies that had been the most adored. But those sales mean investors have cash, so the second event is investors looking for safe haven investments where they can stash that money. There are a few common threads on that front, but the one that's important here is the consumer staples sector.
Hiding out in consumer staples stocks makes sense. These companies make products that people buy regularly, regardless of what is happening in the world. Think toilet paper, toothpaste, and food. You might adjust what brands you buy, but you are most certainly going to keep buying these things even in a deep recession. Kraft Heinz is a consumer staples giant, and it comes with a hefty dose of dividend income, thanks to its lofty 5% or so dividend yield.
Is Kraft Heinz the right place to run for cover?
As the chart above shows, over the past month, the Nasdaq Composite has fallen around 10% or so (as of this writing) while Kraft Heinz's stock price has risen 10%. That's 20% outperformance! Clearly, investors have shifted to a risk-off mentality. But here's the thing: You shouldn't sell indiscriminately, and you shouldn't buy that way, either.
Kraft Heinz's dividend yield is around 5% compared to the consumer staples average of roughly 2.6%. It has a higher yield for a reason. Kraft Heinz's business hasn't been performing all that well. This isn't a new trend -- the company has been facing headwinds since Kraft and Heinz tied the knot several years ago.
The original goal of the merger was to cut costs to improve profitability. But you can only cut costs so far before you need a new plan. After a management shake-up, Kraft Heinz switched gears to focus on its largest and most important brands. That's the same plan that helped Procter & Gamble get back on the growth path. It seems like a reasonable path forward for Kraft Heinz, too.
NASDAQ: KHC
Key Data Points
The only problem is that the brands Kraft Heinz is supposed to be spending all of its time and money supporting haven't been doing very well. In the fourth quarter of 2024, organic sales for its "accelerate" brands fell 5.2%. That follows a 4.5% drop in the third quarter and a 2.4% decline in the second quarter. Same-store sales rose 0.5% in the first quarter of 2024. The clear trend is worse performance, not better.
Given enough time, it seems highly likely that Kraft Heinz will eventually turn its business around and get back on the growth path. But right now, it is simply not hitting on all cylinders. This is clearly not a safe haven just because it is a food maker. This is a turnaround story, which is a higher-risk approach than most investors should be pursuing.
There are other options to choose from
If you want to jump into the consumer staples sector in an effort to keep safe during a market correction (or worse), you would probably be better off buying an exchange-traded fund (ETF), like the Consumer Staples Select Sector SPDR ETF. That will at least provide you with a diversified portfolio of companies that make everyday life necessities. If you want to cherry-pick stocks, Kraft Heinz probably isn't the best option given its weak business fundamentals. Perhaps a still strongly performing Dividend King like Coca-Cola or PepsiCo would be a better choice.
