More Random Gleanings: Kraft Heinz and Berkshire Hathaway

Following on my column Thursday, here are a few more random gleanings. Also, I wanted to offer my sincere thanks to those who reached out via email and social media to offer condolences after I mentioned my mother's recent passing in my Real Money column. She was a devoted Real Money subscriber and in fact supported everything I have ever done, including buying a vacuum cleaner from me the summer that I sold them to make a few bucks.

On occasion I was able to observe her working as a retail stockbroker and it seemed that about 95% of her job entailed educating clients, fitting since long before she entered finance she started her professional career as a teacher. As every teacher knows, some pupils are more willing to learn than others, but as the information age has created such a wealth of resources from which to choose there really is no excuse to not understand what you own. That includes funds, ETFs, individual stocks, bonds and any type of liquid security. As you are reading RM you are already savvy enough to know that, but laziness is the enemy of any investor. So, as my mom felt compelled to tell me on more than one occasion: Do your homework!!!!

Kraft Heinz. Exhibit A in the homework or lack thereof department. Being a sell-side analyst could be a humbling experience, and I had my share of blow-ups while following autos at Lehman, DLS and UBS in the 1990s and early 2000s. But I never had to make anything remotely close to Stifel's (KHC) call this morning, which included a price target cut from $72 to $35. How does that happen? The fair value of a multi-billion dollar multinational cannot drop by more than 50% overnight, can it?

So, the fact that KHC shares just crossed $35 and are trading at all-time lows today -- and 27% less than they were yesterday --  requires some forensics. How did analysts miss the huge decline in Adjusted EBITDA that not only occurred in the fourth quarter --bringing 2018's full year figure to $7.1 billion from 2017's $7.8 billion -- but more importantly is comprehended in KHC management's 2019 forecast of a further decline in Adjusted EBITDA to $6.3-$6.5 billion?

Anyone who blames this on the global consumers' shift away from packaged foods is missing the trees for the forest. No one thought mac and cheese was a growing business, but KHC was trading above $90 per share as recently as June, 2017. Also, the governance issues raised in last night's conference call -- KHC paid a $25 million fine to the SEC in the fourth quarter to settle claims of improper revenue recognition -- have to put the company's financial team's credibility into question.

It's like a Senate hearing. Who knew what and when? Until the Street has comfort with those questions there will not be a bottom in KHC stock. Buying KHC today for the new, $0.40 quarterly dividend -- 36% below the prior $0.625 quarterly rate -- would also be a big mistake.

Berkshire Hathaway. My mom was a big fan of Warren Buffett and was no doubt eagerly anticipating the release of Berkshire's (BRK.B) annual report, a document that she would read and notate -- yes, she took physical notes -- every year. Obviously this year's version of that document will cover the year ending 12/31/2018 and thus won't include the KHC implosion. Berkshire's stake in KHC is 325 million shares, or 26.6% of KHC shares outstanding.

Buffett showed true class and grace in admitting defeat when he exited positions GE (GE) and IBM (IBM) , and as an active asset manager I can tell you that is also an incredibly humbling experience. KHC is different, though, because the company only exists in its current form because Buffett and his Brazilian private equity partners at 3G -- led by current KHC CEO Bernardo Hees -- created the company in a what was essentially an LBO of Heinz. It didn't work. In fact it has been an epic fail.

So, the carnival of capitalism that is Berkshire's annual meeting -- to be held this year on May 4, 2019 in Omaha -- is going to be even more interesting than usual. Mr. Buffett is 88 years old, and while my mom taught me always to resist ageism, it is unreasonable to expect that he is the "day-to-day guy" on Berkshire's book. Someone -- whether it be Todd Combs, Ajit Jain or another member of Berkshire's short bench -- needs to step up and produce a mea culpa on Kraft Heinz. Barring that, BRK.B will continue to underperform its Morningstar benchmarks as it has over the trailing 1-month (0.42% vs. 4.43%) 1-year (2.14% vs. 4.93%) and 10-year (annualized average return of 15.71% vs, 16.27%) periods.

At the time of publication, Jim Collins had no position in the securities mentioned.