This week, Kraft (KHC – Nasdaq) has caught my attention. It seems to be a trading play with a favourable risk reward setup based on a technical chart basis (aim is to get a few bids of profit if any). It is down a hefty 33% in four trading days from US$48.18 on 21 Feb 2019 to close US$32.20 on 27 Feb 2019.

Likely reasons for the fall

Kraft was hammered by a plethora of bad news. Firstly, it reported 4QFY18 net loss of US$12.6b, due mainly to a US$15.4b writedown on its Kraft and Oscar Mayer brands. Secondly, it slashed its regular quarterly dividend from US$0.625 to US$0.40 (ex-div date is on 7 Mar 2019). Thirdly, Kraft reported that it received a subpoena from the Securities and Exchange Commission related to its accounting for vendor agreements.

Basis for a trading play with a favourable risk reward setup

a) Average analyst target US$40.40 spells potential upside

Based on the analysts’ target prices compiled by Bloomberg (see Fig 1 below), average analyst target price is around US$40.40, which represents a potential upside of 26%. Based on this measure, it seems like there is some potential upside, if the analysts are correct. Nevertheless, I hasten to add that there are some analysts who have a sell call (see Fig 1 below) without any target prices. If they have target prices, they may pull down the average target price for Kraft. Besides the potential capital upside, even after considering the 36% cut in quarterly dividend from US$0.625 / share to US$0.40 / share, Kraft’s estimated dividend yield is around 5.0% which is still attractive (barring further cuts).

Fig 1: Average analyst target US$40.40 –> 26% potential upside

Source: Bloomberg 28 Feb 19

b) PE and P/BV valuations at two-year lows

Based on Fig 2 below, Kraft is trading at 9.5x PE and 0.8x P/BV, as compared to its two-year average of 19.5x PE and 1.4x P/BV. It also trades favourably vis-à-vis General Mills’15.0x PE and 3.9x P/BV.

Fig 2: Kraft’s PE and P/BV valuations at two-year lows

Source: Bloomberg 28 Feb 19

c) Stock is all time oversold based on RSI

Based on Chart 1 below, it is evident that Kraft is on a strong long-term downtrend with death cross formations. ADX closed at 28.2 amid negatively placed DIs (indicative of a trend). MACD closed at a rather oversold level at -3.0. MFI closed at 15.5 and RSI closed at 12.9 at an all-time oversold level. There may arguably be limited downside in the near term as oversold pressures build.

Near term supports: US$30.00 / 27.50 / 25.00

Near term resistances: US$34.51 / 35.00 / 36.00

Chart 1: Kraft – all time oversold with RSI at 12.9

Source: InvestingNote 27 Feb 19

As usual, for any stock, besides market risk (it is noteworthy that Nasdaq and Dow have soared for nine consecutive weeks), there are many other risks to be aware of. Examples of risks include (but not limited) to the following:

a) RSI at 12.9 can still go lower

As usual, I wish to caveat that there is no rule to state that RSI cannot go below 10 or even 5. As RSI gets more and more oversold (i.e. lower RSI), the probability of more immediate downside is lesser.

b) Unfamiliar with Kraft’s fundamentals

This is my first time looking at Kraft. As my write-up is more of a short-term technical play for a few bids of potential profit, I have not spent much time to look into Kraft’s fundamentals and background, thus readers should note that I am unfamiliar with Kraft’s fundamentals.

c) Volatile stock – ATR $1.75

The average daily true range of Kraft is around US$1.75 which is around 5.4% of its price. Thus, this is a volatile stock which can swing quite a bit. Readers with lower risk threshold should take note of this.

Conclusion

The above write-up is more of a short-term technical chart outlook where Kraft seems attractive on a risk to reward basis. As mentioned above, I am not familiar with Kraft and there is no rule that RSI will not go lower than 12.9. Readers who wish to know more about Kraft can refer to Kraft’s company website HERE. In addition, there is a good write-up by Motley Fool (click HERE for more information).

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P.S: At the time of doing this write-up, I am not vested in Kraft yet, but I plan to do so with a target of a few bids of  profit  (if any), if price and market developments are in line with my criteria. Do note that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements.

Disclaimer

Please refer to the disclaimer HERE