Brands Are Down but Not Out as Inflation Declines

The past few months have shown a big slowdown in inflation. It’s also shown that consumers are willing to ditch their favorite brands to find less expensive substitutes. However, that trend likely won’t last forever.

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  • As prices in general rise, even substitute brands may not entice consumers as they once did. That could bode well for companies that have a strong basket of brands, even if their profitability has been hit in the short-term.

    For instance, Kraft Heinz (KHC) reported a decline in revenue in its most recent quarter. While the company has been able to raise prices, they’re competing with consumers who are more price conscious and moving to low-cost alternatives, or foregoing products entirely.

    Shares of the packaged food and beverage giant have now been pushed down to about 12 times forward earnings. Plus, Kraft shares now trade under their book value, making for an inexpensive play now.

    Action to take: Investors may like shares here, with some capital on the sidelines to buy more on any drop lower. At present, Kraft yields 4.4 percent.

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  • For traders, shares are likely to trend higher given their valuation now. The October $37.50 calls, last going for about $0.55, could see high double-digit returns on a rally in the coming months.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.