Why this Warren Buffett stock could be about to surge

After weathering an inflationary storm, Stephen Wright thinks this stock is set to bring some good returns for Warren Buffett.

| More on:
Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett is a big fan of consumer staples companies, especially those with strong brands. The Berkshire Hathaway CEO values their predictability and their ability to maintain good returns on tangible assets.

One of these is Kraft Heinz (NASDAQ:KHC). The stock hasn’t done well over the last five years, but I think there could be much better times ahead. 


Inflation has been a big problem for Kraft Heinz recently. Higher input costs have left the company with a choice – raise prices to retailers, or face contracting margins.

The company has been attempting to increase prices, but this comes with a degree of risk. Since switching costs with its products are virtually non-existent, there’s a chance higher prices might just put customers off. 

Kraft Heinz has had some success with this process, but even the best businesses aren’t able to raise price tags indefinitely without sales falling. And the company’s latest 7% increase led to a 5% drop in volumes.

The good news, though, is that inflation appears to be subsiding. In the US (where the company generates 75% of its revenue) the rate of annual price increases has fallen from 9% last June to around 3%. 

That means some of the pressure on margins should be about to let up. And if it does, I think the stock could respond in kind.


At this stage, there’s a chance that the drop in inflation might be temporary. And even if it isn’t, there are other risks for investors to consider – the most prominent of which is the threat of GLP-1 drugs.

These drugs can be prescribed in the US to tackle obesity and diabetes. They have the effect of reducing the amount people consume, which is an obvious issue for a business like Kraft Heinz.

This seems to be weighing on the share prices of companies in the sector generally. But there are reasons for thinking that it might not be the threat the market is currently supposing.

According to Freddie Lait at Latitude Investment Manageenet, around 40% of the US population are classified as obese. Of those, about half might be able to afford the drug and only about half of those are likely to stick with it.

If this is right, then the threat to Kraft Heinz is about 7.5% of overall sales (based on the US market accounting for three-quarters of its sales, as mentioned) by the time GLP-1s are fully rolled out. But that could be some years away and the firm’s revenues might well have grown enough to offset this by then.

Good prospects

Right now, Kraft Heinz shares trade at a price-to-earnings (P/E) ratio of around 11 and come with a dividend yield of around 5%. For a business that has an above average chance of proving resilient in a recession, that looks like a bargain to me.

If US inflation stays at low levels compared to the last few years, I wouldn’t expect the price to hang around here. To me, it looks too low, given the company’s prospects.

Warren Buffett might not be likely to buy more of the stock, with Berkshire already owning over 25% of the outstanding shares. For investors who aren’t in that position, though, I think it’s one to consider buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Berkshire Hathaway and Kraft Heinz. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s one excellent FTSE 100 value stock investors should consider buying

Sumayya Mansoor explains why this packaging giant is currently in value stock territory and should be on investors radars.

Read more »

Close-up of British bank notes
Investing Articles

Here’s how much I’d need to invest in dividend shares for £500 a month in passive income

Our writer explores how much he’d need to invest in FTSE 100 dividend shares to generate an attractive second income…

Read more »

Investing Articles

The Rolls-Royce share price won’t stop rising. Am I missing out by not buying?

It's been an exceptional year for the Rolls-Royce share price and this Fool fears he's been missing out. But is…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Dividend Shares

An 8%+ yield? I need to be careful with this dividend forecast

Jon Smith explains why the dividend forecast for a stock is appealing, but it doesn’t necessarily tell the full story…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

2 UK gold stocks I’d buy as bullion prices hit new record highs!

These gold stocks are soaring as prices of the precious metal take off again. Here's why I'd add them to…

Read more »

Investing Articles

These two FTSE 100 stocks are on the rise – is now the time to buy?

As the mining sector enjoys a boost from China, this Fool UK contributor has his eye on two promising FTSE…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

These 2 FTSE 250 shares have been soaring! Should I buy them right now?

These two FTSE 250 shares have posted strong performances in the last year. Here, this Fool explores if now is…

Read more »

Investing Articles

Why the Tesla share price gives the company a huge competitive advantage

The Tesla share price reflects some optimistic assumptions. But Stephen Wright thinks it also gives the company a competitive advantage…

Read more »