No Such Thing as a Safe Stock

Published On: February 28, 2019

Written by: Ben Atwater and Matt Malick

Throughout our careers, clients have often expressed a preference for owning “safe” or “conservative” stocks.  Our response has always been, “there is no such thing.”

We always hesitate to write about individual stocks because, in a portfolio context, any one stock really shouldn’t matter too much.  We aim to diversify away much of the single stock risk in our portfolios.

However, we couldn’t help but send you a note about Kraft Heinz Company, a stock that suffered a historic plummet last Friday, losing 27.46% of its value in a single day.  This certainly isn’t unprecedented, as individual stocks all too frequently face wipeout days.

What’s so important to recognize about Kraft Heinz is that, in most people’s minds, this is the ultimate defensive (or safe) stock.  It’s a food company that theoretically should face highly inelastic demand (people need to eat).  The company paid a healthy dividend, well over 4%.  It’s largest shareholder, by far, is a guy named Warren Buffet, the “Oracle of Omaha” and the most famous and wealthiest investor ever.  Over the last twelve months, insiders, people who presumably know the most about the company, made 22 purchases and only 4 sales, according to SEC filings.  All of these anecdotes argue for the stability of Kraft Heinz.

We had our own little adventure with Kraft Heinz.  We purchased Kraft long ago and, upon its merger with Heinz in 2015, the stock soared and became our best holding that year.  The stock continued to chug along and perform strongly into early 2017 before gradually beginning to seriously deteriorate.  We sold all of our positions in November of last year, long before Friday’s catastrophe.

There are many lessons to be learned from Kraft Heinz, but among the most important is to always be wary of “safe” stocks (and for that matter any “safe” investment).  Along the same lines, it is vital to vigilantly remain diversified and always follow a disciplined investment process.

Warren Buffett is known to paraphrase the Mae West quote, “Too much of a good thing can be wonderful.”  In this case, too much exposure to a single “conservative” stock would’ve been pretty bad . . .