A stock with a great market positioning and financial performance. Is it a good buying opportunity?


Company background

Headquartered in Pittsburgh, US, the Kraft Heinz Co. is one of the largest consumer packaged food and beverage companies in North America. The company manufactures and sells food and beverage products such as sauces and condiments, cheese and dairy products, meals, meats, coffee, refreshment beverages, as well as other grocery products. Its popular brands include Heinz, Kraft, Oscar Mayer, Philadelphia, Planters, Capri Sun, Maxwell House and others. Kraft Heinz has got presence in around 190 different countries and territories and is a global player in the sector it operates.



Financial performance

By looking at the financial statements of the company, we shall say that we are impressed by the huge success Kraft Heinz has had and the strong financial performance it has managed to keep during the pandemic times in the past year. In fact, the company has kept on beating analysts’ earnings expectations and hasn’t missed on an earnings report in the past 4 quarters, proving its strong financial performance and market positioning even during the coronavirus pandemic in the past year and the economic slowdown that followed.

In fact, it is very important to mention that Kraft Heinz’s products are non-discretionary, meaning the company sells products that are considered of basic necessity and those companies offering such products tend to perform well even such tough times on the market. Overall, Kraft Heinz has outperformed the industry over the past year and has further confirmed its presence in the business it operates. The organic sales of the company grew 6% over the past year, thanks to the company’s efficient pricing strategy, as well as robust product innovation and strategic investments that have kept on boosting the company’s overall financial performance. Moreover, the company’s officials have recently said they are expecting to see around 4-6% adjusted earnings per share growth in the long term, further confirming its strong presence in the sector. KHC has also been very concentrated on managing expenses properly during the pandemic and has been cutting unnecessary costs in order to keep the net profit as high as possible and still keep its dominance in the market.

As we mentioned above, Kraft Heinz beat analysts’ expectations in all 4 quarters last year. By looking at the 4th quarter results, we shall say the company delivered earnings of $0.8 per share versus the $0.74 expected by analysts. That was an increase compared to the Q3 results that came out at $0.70 per share while analysts had expected $0.63.

Kraft Heinz is expected to report its Q1 financial results on the 29th of April and the expectations are for $0.58 per share. By looking at the strong financial performance of the company even during the tough times on the market at the moment, we believe it is very likely that Kraft Heinz would beat that figure and report better than expected earnings that is expected to boost the share price further in the future.


Technical analysis


KHC has been in a massive uptrend in the past year. The stock rose from the lows at $20 on the 20th of March 2020 to reach the $39.30 highs in the beginning of March. In other words, the share price has doubled in 12 months, making huge profits for its traders and investors. That of course has been based on the company’s strong financial performance and market presence we mentioned earlier and the fact that Kraft Heinz has outperformed the industry in 2020. After the massive bullish rally in the past year, it was logical to expect a profit-taking correction in the short-term that occurred just below $40, sending the price to the current levels at $38. The daily chart clearly shows the strong support mark at $35 where we are expecting to see lots of buying pressure after a short-term correction. Moreover, the 50-day moving average matches with the horizontal as well as the diagonal support marks at that point, giving further bullish indications. The technical indicators have gone to the overbought territory already and are signaling for a potential further correction in the short-term mainly based on a profit-taking scenario. So, we would prefer to wait until the price drops and tests the strong support before we start buying and adding it to our portfolio. In case the price falls further, we would expect to see more buying pressure at the next support at $31-$32 where more buying interest is expected. Either way, the price is likely to bounce from one of these key support levels and we would take advantage of that in order to make high profits to the upside.



Chart: KHC


As you know, we at Dow Experts enjoy analyzing different trading and investment opportunities. Furthermore, we always include both fundamental and technical factors that have an impact on the different price movements on a daily basis. Moreover, before we take action to buy a stock we are analyzing, we evaluate the performance of the biggest ETFs out there that the stock plays an important role. In other words, we use our cross-sector correlation analysis in order to figure out whether there is a similarity between the price-action of the current stock we are analyzing and the certain ETFs that have invested in the particular stock. Only in case the recent performance of the ETFs confirms our bullish stance on KHC we would then be interested in buying the stock and adding it to our portfolio.

The Consumer Staples Select Sector SPDR Fund (XLP) tracks a market-cap-weighted index of consumer non-discretionary (staples) stocks drawn from the S&P 500. The XLP represents the performance of the biggest players within the sector, such as Kraft Heinz, Procter & Gamble, Coca-Cola, PepsiCo, Walmart and others. The XLP is a leading ETF with over $10 billion in assets under management and an average daily trading volume of $800 million, making it a very attractive investment opportunity that gives an exposure to one of the biggest sectors within the US economy that has actually been very favourable for investors over the years. The reason for the sector is so attractive is because of the essence of the products the companies within that sector offer – non-discretionary. In other words, the sector is concentrated on selling products of utmost necessity and needed for a customer’s daily life. Thus, those stocks tend to perform well even during bad times on the market and therefore give investors more security and a lower risk on their investment.

By looking at the daily chart of the XLP, we should mention that after the massive rally in the past 11 months, the share price reached the peak for last year at $68 in December, followed by a profit-taking correction that sent the price to the $63-$64 support mark in the first week of March, followed by a massive bullish reaction and lots of buying pressure at that point, leading to another strong bullish rally towards the current levels at $66. Yet, the price is trading right at the strong resistance at that point, while the Stochastics indicator has almost gone to the overbought territory, while the RSI is at 60 and could soon start giving short-term selling indications. In other words, the price is likely to face some profit-taking interest around the current levels at $66 that could bring it down towards the strong support at $63-$64 again where more buying pressure is expected again. In case the price breaks that level to the downside, the next strong support mark at $62 is likely to motivate traders and investors to buy even more of the XLP and we believe it is reasonable to expect the price to bounce from one of these major support levels.


Chart: XLP


Overall, we shall say the recent performance of the XLP clearly confirms our short-term neutral position and interest of buying after a profit-taking correction in the near future.

In order to further confirm our bullish stance on the KHC stock, we would evaluate the performance of the XLV. (Health Care Select Sector SPDR Fund). The correlation between the XLP and the XLV is 75%.

The Health Care Select Sector SPDR Fund (XLV) dominates the US health care sector on practically every measure. The ETF provides exposure to companies in the pharmaceuticals, health care providers and services, health care equipment and supplies, biotechnology, health care technology industries, as well as life sciences tools and services. In fact, the XLV is the oldest in the segment and as such it is being used for strategic and tactical positions. Moreover, the XLV is cap weighted and focuses on mega-cap companies that are part of the S&P 500. Therefore, due to its heavy exposure in the large cap stocks, the XLV’s performance is quite hard to beat.

By looking at the daily chart of the XLV, one could see the massive uptrend that has been going on the leading ETF’s chart over the past 12 months. It bounced from the $73 lows in March 2020 and restarted its strong uptrend, breaking a few key resistance levels to the upside such as the $96, followed by the psychological resistance at $100 and the $110 to reach the highs at $119 in the end of January this year. Since then, we have seen quite a lot of profit taking interest, which was quite logical after the huge bullish rally in the 9 months before that. Thus, the price went down to test the strong support at $110 where investors and traders realized the great buying opportunity that the price offers at that key support mark and started buying, leading to an immediate bullish reaction afterwards to the current levels at $115. Yet, the price is currently testing the key resistance at that point and in case it fails to break it to the upside we would expect to see some short-term profit-taking interest and that could lead to a correction back towards the $110-$100 support marks. Yet, by taking into account the major support marks at that point it is very likely the price would reverse its strong uptrend from these levels and we believe buying around those support marks would be a reasonable decision.



Chart: XLV


By analyzing the overall performance of the XLV, we should say it clearly confirms our bullish stance on the Kraft Heinz stock.


Conclusion

After analyzing the financial performance of Kraft Heinz Co. (KHC), we have concluded that the company has got a very solid presence in the market it operates and that is confirmed by its strong financial performance and the strong quarterly results the company has been reporting. Moreover, Kraft Heinz managed to keep its revenues and profits quite high even during the coronavirus pandemic, which is quite impressive taking into account the global economic slowdown that was caused by the virus. This gives us a further confirmation that KHC is a stock we would like to own in our portfolio. The ETFs we analyzed (XLP & XLV) clearly confirmed our bullish stance on the stock and therefore we have decided to wait for a bit of a correction and start buying the stock.

As we mentioned earlier, the price failed to break the key resistance at $40 and is now logically making a short-term correction to the downside. The first key support from the current levels is at $35 where we are expecting to see lots of buying pressure and will start buying at around $36, just above the support mark. In case the price drops further, we would be interested in buying even more aggressively at the next major support at $31-$32 and believe it is very possible the price would reverse its strong uptrend from these levels. Buying again at the next key support would give us a chance to get a better average price on the stock and therefore be able to further maximize our profitability to the upside. Our initial profit-taking target would be set at $38-$39, below the $40 resistance, followed by the next target at $45-$46 where we would be fully cashing in our profits and waiting for another correction on the price that would allow us to buy it again at a strong support and make high profits to the upside.


Sincerely,

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