forex signal system trading: Should You Buy Kraft-Heinz After its Big Drop?

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Revealed: When to Buy Beaten-Down Companies

At some point or another, any publicly-traded company will see its share price dive. The reasons can vary from management problems to a big earnings miss, or even something like a dividend cut.

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Today, after years of mergers substantially reducing the total number of publicly-traded companies in the first place, many companies have another potential landmine.

That landmine is goodwill. That's a term on a company's balance sheet. When one company acquires another, they tend to overpay. They can't help it. That's the price of getting another company's shares from existing shareholders. This extra cost of acquisition is listed as goodwill.

If a combined company continues to grow, the goodwill is justified. The acquiring company simply paid what the other company would have been worth down the line if the growth had continued anyway. But if the combined company struggles, the goodwill is often written off.

When this happens, it's an admission that the company overpaid, and shares tend to dive as a result.

This happened last month with Kraft-Heinz (KHC). The maker of foods and condiments had a $15 billion write-down of goodwill, indicating that their entire mega-merger may have been a mistake for investors.

While a goodwill write down is devastating for current investors, it may be a solid buying opportunity for new investors. That's because these situations don't just correct, they overcorrect. That means that there can be some extra value to unlock. And with negative sentiment surrounding the stock now, that bargain can be extreme.

Given that the goodwill write-down is mostly an accounting measure, and not related to cash earnings, Kraft-Heinz shares are worth a buy. But the company isn't growing as fast as its executives expected when they sold the merger. So while there is a potential profit to be made in buying shares, it could take some time to play out.

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