Blowups

"I hate losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko

Sooner or later stock investors must cope with blowups. A blowup is when a stock suddenly tanks following the release of unexpectedly negative news about the underlying company. A common venue for blowups is the quarterly earnings cycle where financial reports are released and often complemented by conference calls between company executives and the analyst community.

After the bell yesterday, Kraft Heinz Co (KHC) blew up following the release of its earnings and a slew of negative news. Rather than finesse several bad news items over a period of time, it appeared KHC management decided to push it all out the door at once. In addition to a considerable earnings miss, unsuspecting investors and analysts were greeted with news of an SEC investigation into accounting practices, a $15 billion write-down of brand assets, and a substantial dividend cut.

Needless to say, the news hit the stock pretty hard. From a Thursday close of about $48, the stock immediately gapped 10% lower in after-hours trading before closing the evening at about $38. After gapping down $2 more in pre-market trading it opened this morning at $36 and has never been up for air since then. Currently it's trading around $35/share, down a cool 27% from yesterday on gigantic volume.

What's an investor in KHC to do? If you know the company's situation well and you can see a bright future on the other side of this episode then you'll probably hold on, or perhaps buy more. However, the fact that the avalanche of negative news released by management blind-sided many people--including analysts who supposedly follow the company closely--suggests that many stockholders may not sufficiently understand their investment positions. This is a recipe for trouble.

To be sure, it can be painful to realize a sudden and unforeseen investment loss. But when stock blowups are grounded in complex and difficult-to-handicap situations like this one, it is sometimes better to cut and run.

no positions