Kraft Heinz (NASDAQ:KHC) stock soared 20% on Friday as part of a broader market rally that boosted many stocks by double-digit percentages.
The gains were glorious in their own right, but the sad reality is that they pale in comparison to the dismantling KHC stock has suffered this year.
And with the continued fallout surrounding this year’s novel outbreak of coronavirus over the weekend, stocks are set for a jaw-dropping plunge at the open. At the time of this writing, Kraft Heinz was down 11% in pre-market trading.
Let’s take a look at the price trends and levels that are driving the stock right now. For background, let’s begin by evaluating the overall market sector — consumer staples.
The Safety of Staples
In theory, companies calling the consumer staples sector home are supposed to outperform during market meltdowns. This is due in large part to their business models being less sensitive to economic downturns.
While a recession lowers the demand for discretionary items like boats and toys, it doesn’t put much of a dent in consumers’ desires for food and beverage. People still need to eat. But you don’t have to buy into the common sense narrative: there’s data to back it up.
During the 2000-2002 bear market, the S&P 500 fell 50% from peak to trough. The Consumer Staples ETF (NYSEARCA:XLP), on the other hand, only dropped 2%. And that wasn’t a one-off. Its resiliency repeated during the ’08 crash. The S&P 500’s price decline reached -57%. The staples sector, meanwhile, only dropped 29%. During both downturns, consumer staples was hands-down the best performing market sector.
With that kind of track record, you would think a stock like Kraft-Heinz would be well-positioned to sidestep much of the current market drama. After all, their business is all about the manufacturing and marketing of a broad array of food products. Unfortunately, the company was struggling long before the current crisis, and its price drop has outpaced that of the broader market.
Kraft-Heinz Stock Charts
The three-year demise of KHC would be unfortunate against any backdrop. But the fact that it took place while the broader market was notching record highs month-after-month is particularly dreadful. And the relative weakness hasn’t gotten any better in 2020 with the stock down 32% so far. This compares to the S&P 500’s year-to-date drawdown of only 29%. It’s not a huge gap, mind you, but the consumer staples sector ETF is only down 21%.
Last week’s crash ushered Kraft-Heinz stock to a fresh 52-week low after cracking key support near $25. Momentum increased during the whack, confirming a pick-up in downside acceleration. Volume patterns paint a grim picture as well, with almost a dozen distribution days over the past month. Until we return to uptrending status, climbing north of all major moving averages, I see no reason to buy KHC.
I’ll cede that its 6.68% dividend yield has become attractive, but as the bear market continues, you’re likely to find equally compelling payouts in a number of stocks. Besides, it’s better to buy on the way back up.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!