New CEO Greg Abel called one of Berkshire Hathaway’s long-term investments “fairly short.” Should investors sell stocks?

In 2013, Berkshire Hathaway (NYSE: BRKA )(NYSE: BRKB) Brazilian private equity firm 3G has partnered to acquire Heinz for an enterprise value of $28 billion. Two years later, they joined forces with Kraft to form Heinz Kraft Heinz (NASDAQ: KHC )Company investors know today. Investing was actually Warren Buffett’s worst.

Since the merger, the stock has declined nearly 67%, and Berkshire still owns 27.5% of the company. In his first letter to shareholders, new CEO Greg Abel admitted that “our returns were fairly low.” Should investors sell stocks?

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Kraft Heinz, maker of popular food brands such as Heinz ketchup, Philadelphia cream cheese, and Oscar Mayer beef, has struggled amid competition and a shift in consumer preferences toward healthier, less processed alternatives.

Some may argue that 3G, known for implementing major cost-cutting measures, has not invested enough in brands, marketing, and new product development to meet and engage the needs of modern consumers. However, the company has significant debt, and financial performance has struggled.

While Berkshire is sticking with the stock, its patience has apparently run out. In May, he gave up his two seats on the company’s board of directors. At the time, Kraft Heinz said it would evaluate strategic transactions to unlock shareholder value.

Last September, the company announced that it would split into two companies, one focused on brands poised for growth, such as those in emerging markets, and the other, which includes more “beloved brands” and has a larger scale, enabling it to generate reliable free cash flow. The Berkshire team was not a fan of the plan. In September, former CEO Warren Buffett told CNBC that he was disappointed by it and didn’t think it was the right solution to the company’s problems.

In a Securities and Exchange Commission filing in late January, Berkshire sought to register a potential resale of all of its outstanding Kraft Heinz shares. The firm wrote down its investment in the food company for nearly $7 billion on two separate occasions, once in 2019 and once last August.

But the story did not end there. Kraft Heinz hired a new CEO, Steve Cahlin, in January, apparently to carry out the split, as Cahlin helped split Kellogg into two companies.

But in early February, he announced it would stop working to split the company, saying he believed Kraft Heinz’s issues were “solvable and within our control,” according to CNBC. Cahlin added that his goal is to return the company to profitable growth, and he announced a $600 million investment to fuel those efforts by expanding marketing, sales, and research and development.

While Abel applauded the decision, others were less enthusiastic. “Investors will look at this negatively because it indicates that the business is not in a strong enough position to operate on its own, and it is not known when they will,” said Robert Mosko, a TD Cowen-Part. Toronto Dominion Bank — said in a research note, according to CNBC.

Given the company’s failure to create shareholder value over the past decade, I still see Kraft Heinz as a value trap and a “show me” story. Now, the company has a trailing 12-month dividend yield of 6.62% and a free cash flow yield of 12.75%, making it attractive to those looking to generate passive income. However, shares could fall further or continue to significantly underperform the broader market, so even this play does not come without risk.

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Bram Berkowitz has no position in any of the listed stocks. The Motley Fool owns and recommends positions in Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. Motley Fool has a disclosure policy.

New CEO Greg Abel called one of Berkshire Hathaway’s long-term investments “fairly short.” Should investors sell stocks? Originally published by Motley Fool