Kraft Heinz Company’s Downgrade is a Chance for Quick Income

The downgrade may have been premature

Even as the rest of the market pushed higher yesterday, consumer staples stocks like The Kraft Heinz Company (NYSE:KHC) pulled back slightly.

The future is more uncertain now that COVID-19 cases are rising across the U.S, but so far states are still reopening, meaning more consumers can eat out.

As a result, an analyst at Goldman Sachs downgraded KHC, which may have contributed to its slight pullback yesterday.

Most investors are looking for stocks that will grow, and yesterday, much of the market’s gains came from the FAANGM stocks and the retail sector. Some retailers like The Gap, Inc. (NYSE:GPS) and Walmart, Inc. (NYSE:WMT) even received analyst upgrades.

KHC’s pullback presents a perfect opportunity to sell a put write against consumer staples stock for extra income.

KHC Wasn’t a Growth Stock to Begin With

KHC is a consumer staples stock like The Coca-Cola Company (NYSE:KO), and these aren’t companies known for growth. Consumer staples is a more defensive sector, and one reason investor have flocked to it is the unbelievable amount of risk in the market.

The analyst responsible for the downgrade at Goldman Sachs said, “industry growth will become scarce in 2021,” but 2021 is a long way off if you’re an options trader.

If KHC’s advantage was lower restaurant attendance, that also doesn’t seem like it will recover anytime soon. Many consumers said they won’t be comfortable until 2021.

I don’t necessarily think KHC is going to jump higher, but I certainly think it will maintain its recent gains while investors navigate this uncertain time.

KHC’s New Support Level

Before the COVID-19 pandemic, KHC was rejected at around $32. Then it failed to clear $31 several times. In the chart below, you can see that $31 is now acting as support.

Daily Chart of  The Kraft Heinz Company (KHC) — Chart Source: TradingView

KHC is trading higher than it was before the pandemic, and part of its strength is probably due to an expected increase in sales. Other consumer staples stocks like Campbell Soup Company (NYSE:CPB) have seen a jump in sales simply because consumers are staying in more.

While CPB expects to maintain its increased sales after the pandemic, I’m not thinking that far ahead for KHC. With the put write I’m recommending, KHC only needs to maintain its support through late July, and in the short term, that seems more than doable.

Sell to open the KHC July 24th $29.50 put at about $0.30.

Note: Be sure you are opening the weekly KHC options that expire on Friday, July 24, 2020.

This is a high-risk trade, so take a small position.

About Naked Put Writes

A naked put write is a bullish position in which you expect the price of the underlying stock to increase.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


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