Do you like bargain stocks? And are you a fan of Warren Buffett's stock-picking approach? If your answer to both of these questions is "yes," then you're in luck! While true value stocks are few and far between these days, a handful of names currently held in Buffett's Berkshire Hathaway portfolio are dirt cheap.
And one of them could make you much richer in the foreseeable future. That stock? The Kraft Heinz Company (KHC 0.84%).
Buffett's long, miserable journey with Kraft Heinz
If you keep regular tabs on Buffett's picks, you may be a bit surprised to see Kraft Heinz suggested as a ticker worth owning. The stock's been a disaster since it was formed out of the merger of food giants Kraft and Heinz back in 2015, a deal Buffett helped orchestrate for his then-holding in Heinz. The synergies hoped for at the time just never took shape, eventually dragging the stock well below its 2017 peak.
By 2019, Buffett was forced to admit, "We overpaid for Kraft." In retrospect, that was the Oracle of Omaha's subtle way of saying that neither the two companies nor their brand names meshed together all that well, and the expected cost savings were never realized.
Then the pandemic took hold, followed by rampant inflation. Competitors have been stepping up their games as well. The end result? Kraft Heinz shares are still down more than 60% from 2017's high, having made no net progress since early 2021.
NASDAQ: KHC
Key Data Points
There's a reason, however, that Warren Buffett is keeping Berkshire Hathaway in the 325 million shares of Kraft Heinz it's been holding since the two companies became one back in 2015. Buffett still believes in Kraft Heinz's potential. And well he should for several reasons.
Meet the new and improved Kraft Heinz
Chief among these reasons is the fact that after a long and miserable post-merger journey, there's finally a light at the end of the tunnel. Relatively new CEO Carlos Abrams-Rivera appears to have his finger on the pulse of what's been ailing The Kraft Heinz Company the most. That's a misunderstanding of what consumers really want from food brands.
Right now, people just want low-cost-but-tasty convenience. That's why the company's popular macaroni and cheese products are being repositioned as meals in and of themselves, for example, while the launch of the 360 Crisp line of frozen food products allows consumers to make crispy grilled cheese sandwiches in the microwave rather than on a griddle. Underscoring Kraft Heinz's efforts is the fact that it was recently rated as one of the world's most innovative companies by Fast Company.
Product development is only half of the battle for a corporate turnaround, of course. There's the fiscal aspect, too, which is where this merger truly disappointed. The company is finally taking a long, honest look at expenses that just don't need to be incurred. To this end, Kraft Heinz is aiming to reduce annual spending by $2.5 billion by 2027; $700 million of this was culled last year. For perspective, last year the organization turned $26.6 billion worth of revenue into net income of just over $2.8 billion.
There's yet one more reason Kraft Heinz's foreseeable future looks brighter than its recent past. For the first time in a long while the company is relying heavily on data rather than instincts or history to make strategic decisions.
Interested investors shouldn't have to wait for these efforts to start making a difference on the company's top and bottom lines either. Last year's modest revenue growth still supported net income growth of 20%. Analysts are looking for more of this forward progress this year and next.
Time to follow Warren Buffett's lead
Still, Kraft Heinz? Even when the company is firing on all cylinders there are higher-growth options out there. Those options come at a higher risk, however, in the form of markedly steeper valuations.
Whereas the S&P 500's trailing price-to-earnings ratio now stands at more than 23 while its forward-looking price/earnings ratio is over 21 (both of which are above long-term norms), Kraft Heinz stock is only trading at 15.5 times its trailing earnings and less than 12 times this year's expected per-share profits. That's cheap by any standard in any market environment.
Better yet, new investors will be plugging into Kraft Heinz shares at a dividend yield of over 4.4% versus the S&P 500's 1.35%. This may be why Buffett has remained so patient with Berkshire's position in the struggling stock -- it's still dishing out plenty of cash.
So connect the dots. The market's not pricing in any of The Kraft Heinz Company's turnaround right now. Investors can't ignore these efforts forever, though, especially now that they're getting traction. You may want to take your shot on this Buffett-owned stock before a bunch of other investors figure it out.
