Kraft Heinz Co., the company that makes Kool-Aid and Velveeta, saw its bonds lose their investment-grade status and fall into “junk” territory after two credit ratings firms on Friday downgraded the debt.

The moves by Fitch Ratings and S&P Global Ratings turned Kraft’s debt into a “fallen angel,” a term used by fixed-income investors to refer to a situation in which a company’s debt goes from investment-grade to junk status. Moody’s Investors Service still considers Kraft bonds investment-grade, but has placed the company on negative outlook, a sign that it could also deliver a downgrade.

S&P Global Ratings late Friday cut Kraft’s rating by one notch to BB+ from BBB-, the lowest investment-grade rung. Fitch made the same move earlier in the day.

Kraft’s decision not to cut its dividend on Thursday may have weighed on its perceived creditworthiness, and contrasted with other BBB-rated issuers that have made efforts to reduce debt levels, according to investors.

Asked for comment, a Kraft spokesman said the company believed it was important to shareholders to maintain its dividend during a time of transformation.

“We also remain committed to reducing leverage over time as we reposition the company for sustainable growth and returns,” said Michael Mullen, senior vice president of corporate affairs for Kraft Heinz.

The worry among some investors is that insurers, pension funds and other mutual funds with strict restrictions against owning junk bonds will now be forced to sell the debt, spurring additional losses from the bonds.

On the flip side, a selloff sparked by Kraft’s downgrade into junk could offer buying opportunities, particularly at a time when yields on the BB-rated segment of U.S. junk-bond market stand near 3.5%.

“As we’ve heard about for quite some time now from the Street, there is some risk of fallen angels in the market,” said Brian Kennedy, a co-portfolio manager of Loomis, Sayles & Company’s multisector institutional strategies and mutual funds.

“But as much as these companies may be struggling in the shorter-term, these do supply some investors with significant opportunities,” he said.

More so than other fallen angels, Kraft’s debt could be harder for bond funds with stricter limitations to absorb.

Around $14 billion of the food company’s bonds mature after 10 years, with some extending as far as 30 years, according to BofA Global Research. As many sub-investment grade portfolios lean toward shorter-dated debt, it could be harder for those longer-dated bonds to find a new home.

The company’s bonds have taken a shellacking in the last few days, even after the food and beverage company reported a fourth-quarter profit on Thursday that beat expectations, while sales fell short.

Its most actively traded bonds set to mature in June 2046 traded at yields as low as 5.14% Friday following the second downgrade, nearly a percentage point up from 4.14% on Monday, according to bond trading and pricing platform MarketAxess. Falling bond prices push yields higher.

Analysts at CreditSights said they expect ongoing pressure on the “gargantuan” $29.2 billion pile of Kraft debt that will no longer qualify for inclusion in investment-grade bond indexes, in a Friday note following the second downgrade.

Goldman Sachs equity analysts led by Jason English argued that while Kraft’s management said the company intends to get its leverage ratio back below 4 times, they failed to provide a deadline to achieve that target. By Goldman’s estimate, the target may not be reached until the 2027 fiscal year.

“We believe this is likely to be too gradual for either management or the credit agencies to accept and instead believe management would need to pursue divestments to accelerate this process,” the team wrote in a Thursday client note.

Kraft’s finances have become increasingly strained as it tries to catch up with consumers’ fast-changing tastes. Demand for healthier foods has weighed on appetite for processed products, the mainstay of the food and beverage giant’s product line.

The company also took a more than $15 billion impairment charge for 2018.

The portfolio manager who helps run a mutual fund that consistently beats the market and its peers said the key to his success is being able to wait for stocks to pop.

The D.F. Dent Premier Growth Fund, which has returned over 15% annually over the past 10 years and notched a 42.9% gain in 2019, historically beats both the S&P 500 and the Morningstar average for large cap growth funds. The fund typically has around 40 stocks in its portfolio, with most of the holdings being large cap stocks. About 10% of holdings are small cap stocks, which the fund defines as market caps under $3 billion.

Bruce Kennedy, a portfolio manager at D.F. Dent since 2007 with prior experience at T. Rowe Price and Goldman Sachs and a co-manager of the fund, said the fund tries not to focus on capturing quick spikes in upcoming quarters but instead looks for stocks that have the potential to grow dramatically within a wider time window.

Being able to take a longer view gives the fund an advantage over other traders, Kennedy said.

“I had a former boss who shared with me the term of a popcorn stock. If you think about a kernel of popcorn you put in your popcorn popper, that kernel could pop in five seconds or it could pop in two minutes, except you’re pretty confident that if you put a kernel in the popper probably 95% of them will pop,” Kennedy said.

“So we look for stocks that are like that, where you’re not sure if the stock will work in the next three months or six months or maybe it will be three or four years, except you see enough ingredients in place that could make it a winning stock that the risk reward is favorable,” he said.

What to look for

The fund’s current kernels include a mix of financial and payment companies, including Visa, S&P Global and specialty insurer Markel, which Kennedy likened to a “mini Berkshire Hathaway.”

Kennedy said the investments aren’t based on a belief about the direction of the financial industry, but instead reflect confidence about the specific companies, including their lack of leverage. He also said the fund is interested in financials and other companies that are light on physical assets.

“Essentially, if you have an asset-light company then you don’t need capital to grow. So if you have a growth oriented business model — let’s say you’re Marriott and you can grow your business on somebody else’s capital, then that’s great and it leads to very good returns to shareholders,” Kennedy said.

Valuing stocks differs from company to company, Kennedy said. He pointed to Amazon as a company that, based on current earnings, could be seen as overvalued, but investors know it has the potential to significantly grow profits in the future.

“There’s no magic to it, no fancy back box or top secret stored in a vault, anything like that. It depends a lot on the company,” Kennedy said.

When to sell

The fund has a turnover of about 20-30% annually on a dollar basis, with between four and eight stocks typically added each year, Chief Operating Officer Michael Morill said.

The fund is active at trimming and growing positions over time, but Kennedy said the fund is careful not to have hard price targets to either buy or sell.

“We don’t have any stop-loss targets, and that’s in part because if we did in 2009 then the whole portfolio would have been sold at just the wrong time. And we don’t have specific targets, just because all of our decisions are relative to our other opportunities,” Kennedy said.

When the fund decides it is time to remove a stock, the managers will dissolve the position over time to get the best possible return, Kennedy said.

“We won’t necessarily blow the stock out the next day because that’s not always the best thing to do, and often there are a lot of other people thinking the same thing … sometimes it takes a day, sometimes it takes a month, sometimes it takes a year, but it’s on the path out of the portfolio,” Kennedy said.

It appears that the stock market bears have either disappeared or been transformed into bulls. Occasionally, someone attempts to ignite concern about real risks, but even those efforts peter out. The rising market is evidently “proof” that worries and worrywarts are wrongheaded.

So, it’s official: The stock market’s rocky, wall-of-worry climb has morphed into a smooth, growth cruise. This attitudinal shift is full-fledged: From September’s recession-bearishness to today’s growth-bullishness.

While such a move is typical of negative to positive market moves, this one has produced an (over?) confident view of what lies ahead. Such conviction makes investors and the stock market vulnerable to disappointment.

Therefore, now looks to be a good time to be a contrarian and focus on the risks.

So, what is there to worry about?

Below are the three major issues that create real uncertainty. They should neither be taken lightly nor dismissed.

First: Earnings growth forecasts

Yes, analysts expect company earnings growth to go from good to great this year and next. However, investing history is filled with such forecasts being upended. Thus, the more investors rely on those growth forecasts, the greater the hit to stock prices if growth expectations dampen.

Are investors overconfident now? Not necessarily. However, the lack of a counterpoint discussion about coming growth (i.e., a recognition of uncertainty) is, itself, an indication that over-optimism is near, if not here.

Unconvinced of growth forecast vulnerability? Think back five months to the belief that low or negative growth (recession!) was coming this year. Forecasts are nothing, if not changeable.

Second: Stretched financial conditions – Federal deficit spending, debt outstanding and issuance, combined with the Federal Reserve’s low-rate, money-creation, boost-inflation policies

These interwoven issues have been brought up before, but they produced little attention and certainly no worry in the markets. The stock market blithely treks upward, and bond prices/yields act as if the comfortable status quo is here to stay.

So, what should we do about these real risks when the markets remain positive and calm? Worry and prepare.

This financial environment invites a strong, contrarian stance because the conditions are already in place, and they have been the root of serious troubles before.

Third: Five leading technology companies under FTC antitrust scrutiny

Note: This risk may seem well into the future, but its impact could come much sooner, particularly because the leading tech companies have been the high-priced drivers of this stock market rise. We can assume that the analysts are already pouring over each company’s past acquisitions to see where the troubles may be. Any negative findings could be an early source of concern and selling for any of the five high-priced tech biggies: Alphabet (Google), Amazon, Apple, Facebook and Microsoft.

The importance of these five companies in the stock market is large. They are the top five companies in the U.S. by market capitalization in this order (as of February 14 close): Apple ($1.45 T), Microsoft ($1.41 T), Amazon ($1.05 T), Alphabet/Google ($1.04 T), Facebook ($0.61 T) = Total ($5.55 T)

Here is the proportion the five represent of the major stock market indexes:

• DJIA (only Apple and Microsoft, price-weighted) – 11.8%
• S&P 500 – 18.6% of $29.8 T
• Nasdaq (all companies; excludes ETFs) – 34.9% of $15.9 T
• Nasdaq 100 – 49.5% of $11.2 T

The U.S. Federal Trade Commission is going to examine the companies’ acquisitions made over the past ten years. The question is whether the purchases fulfilled a strategic company goal or simply deleted a potential competitor and archived its patents.

What will the government find? Likely, there are purchases that fall into the anticompetitive corner. The question then is what happens next. A fine? A forced divestiture? A prolonged legal battle?

More importantly for investors, what happens to the stock price? At this point, it may seem that “nothing” is the most likely response. However, negative revelations have a way of making executive reputations shift overnight from wise and savvy to calculating and deceitful. Just imagine if it turns out that a promising product or process was squelched by a big tech company to protect its inferior offering. It has happened in the past – all that is needed is cash (or a high-priced stock) and a willingness to do it.

Such a revelation can easily dampen investors’ enthusiasm for a high-priced stock.

The bottom line

In less than five months, the U.S. stock market has gone from recession-bearish to growth-bullish. More importantly, outspoken bears have disappeared or donned bull attire. Therefore, it is time to think about what could go wrong.

The three issues above do not represent a complete list, but they are major and carry real risks. No matter how you invest, keeping them in mind will help you be prepared to take appropriate steps if conditions or events give off negative signals in any of the three areas.

Should you be in cash? That depends completely on your investing approach and experience. Personally, I am willing to hold cash and focus on short-term speculation until risk takes its place at the investing table again.

Important: Regaining an appreciation of risk likely means that something goes awry, thereby causing stock prices to weaken and investors to start worrying again. It does not mean either that a recession is coming or that a correction is occurring. However, the decline should wash out excesses and make stock valuations reasonable.

Warren Buffett’s Berkshire Hathaway Inc on Friday said it has taken a $549.1 million stake in Kroger Co, investing in the largest U.S. supermarket chain as smaller rivals struggle.

In a regulatory filing detailing its U.S.-listed investments as of Dec. 31, Berkshire also said it took a new 648,000 share stake in drugmaker Biogen Inc worth $192.4 million, and significantly reduced its stakes in two major banks, Wells Fargo & Co and Goldman Sachs Group Inc.

Berkshire has sold more than 86 million shares, or 21%, of its Wells Fargo stake since June 30, as the bank tries to restore its reputation following scandals over its mistreatment of customers.

Since the scandals began erupting in September 2016, the Standard & Poor’s 500 has risen 55%, while Wells Fargo is down 3%. Berkshire began investing in Wells Fargo in 1989.

Kroger shares rose 3.9% and Biogen rose 1.5% in after-hours trading, a sign of investors’ regard for Buffett and the Omaha, Nebraska-based conglomerate he has run since 1965.

Investors monitor Berkshire’s quarterly filings to see where Buffett and his portfolio managers Ted Weschler and Todd Combs, who is also chief executive of Berkshire’s Geico car insurer, see value.

Friday’s filing does not say who bought or sold particular stocks, though Buffett normally directs big investments such as Wells Fargo and Apple Inc, Berkshire’s largest.

Buffett’s assistant, along with Kroger and Biogen, did not immediately respond to requests for comment.

Kroger, in which Berkshire disclosed an 18.94 million share stake, has invested heavily to expand online, upgrade stores and improve deliveries to compete with Walmart Inc and Amazon.com Inc, the latter also a Berkshire holding.

Many smaller chains have fared worse, and Earth Fare, Fairway and Lucky’s have sought bankruptcy protection this year. Kroger had invested in Lucky’s.

Berkshire’s Wells Fargo stake fell 15% in the quarter to 323.2 million shares worth $17.4 billion, trailing its stakes in Bank of America Corp and American Express Co.

The Goldman stake shrank 35% to 12 million shares worth $2.8 billion. That stake had its origins in Buffett’s lucrative foray into Goldman preferred stock during the 2008 financial crisis.

Berkshire also has more than 90 operating units including Geico, the BNSF railroad, Dairy Queen ice cream and namesake energy, real estate brokerage and auto dealer businesses.

Friday’s filing suggests Berkshire’s stock buying did not significantly dent its $128.2 billion cash hoard from Sept. 30.

Berkshire should discuss its holdings more on Feb. 22, when it releases its annual report and Buffett’s annual letter to shareholders.

Simon Property Group is on a buying spree as America’s mall operators grapple with declining foot traffic and some struggle to keep their doors open.

The biggest mall owner in the U.S. is close to wrapping up an $81 million deal to rescue teen apparel retailer Forever 21 out of bankruptcy court, the same week it announced its plans to acquire rival mall owner Taubman in a deal valued at $3.6 billion.

With Taubman, Simon is doubling down on its thesis that the best and most profitable malls in America will survive, analysts say. And in buying Forever 21, Simon is proving it has the strong balance sheet to make a risky bet or two. As of Dec. 31, Simon had over $7.1 billion of liquidity, including cash on hand.

“We have zigged when others have zagged,” Simon CEO David Simon told analysts during a call earlier this month.

The news comes as America’s mall owners are faced with some of the most pressure they have ever seen, with retail store closures mounting and bankruptcies rising as more consumers shop online from their couches. Investors fear that as store closures pile up, the real estate owners won’t be able to fill spaces quickly enough, losing out on rent income.

Macerich shares are down nearly 48% from a year ago, Washington Prime Group shares are down almost 50%, and CBL’s stock has tanked 68%.

Simon shares are down about 24% over the past 12 months. The real estate owner has a market cap of about $44.8 billion.

The Forever 21 deal

Simon — in a group that includes U.S. mall owner Brookfield Property Partners and Barneys owner Authentic Brands Group — has made an $81 million, stalking-horse bid to rescue Forever 21, which filed for bankruptcy last September. Forever 21 said this past Sunday that it was canceling a planned auction, after no other bidders emerged, inching Simon’s plan one step closer to approval. A successful bid, among other things, would allow Simon to keep its Forever 21 stores open.

Forever 21 still faces its own struggles, which Simon, with the help of Brookfield and Authentic Brands, will be tasked with fixing. The apparel retailer’s sales started to slump as the business expanded too rapidly overseas, sparking supply-chain complications. It faces heightened competition from other fast-fashion retailers such as Zara, H&M and Uniqlo.

Simon has good incentive to solve the problems: Itis one of Forever 21′s largest landlords, with 98 Forever 21 stores at its malls and outlet centers.

It has bought a retailer before. In 2016, Simon was part of a group that put up $243 million to save tween and teen apparel retailer Aeropostale from bankruptcy court. “When you look at Aero, they have been able to turn that around,” said Alexander Goldfarb, Sandler O’Neill & Partners managing director and senior REIT analyst. “I see no reason why Forever 21 doesn’t work.”

Simon has since 2016 told analysts that it invested about $25 million in Aeropostale and has received about $13 million back. It grew Aeropostale’s earnings before interest, taxes, depreciation and amortization to $80 million from a loss of $100 million three years ago.

“Our group’s successful turnaround at Aero … gives us confidence with our ability to do the same with Forever 21,” CEO Simon said on an earnings call earlier this month. “Forever 21 is a storied and widely recognized brand with over $2 billion in global sales. We believe Forever 21, similar to Aero, presents a very interesting re-positioning opportunity.”

More malls for Simon

The Taubman deal shows how Simon is betting on top-tier malls, which are performing better than their lower-tier counterparts.

Simon announced Monday that it agreed to buy Taubman, which runs about two dozen high-end properties — including Beverly Center in Los Angeles and The Mall at Short Hills in Short Hills, New Jersey — for a price tag of $3.6 billion. Taubman also has 21 Forever 21 stores, court filings show.

“It made all the economic sense in the world for Simon to buy Taubman,” said Vince Tibone, a lead retail analyst at commercial real estate services firm Green Street Advisors. Similar to Simon’s proposal to buy Forever 21 being a steal, he said, this is going to be done at a “fair price,” especially given the sell-off over the past year in Taubman shares.

Simon will still have “the best balance sheet in the mall sector,” Tibone added.

Simon said for Taubman it would be paying $52.50 a share, or a 51% premium to where Taubman shares closed Feb. 7, the last trading day before the deal was announced Feb. 10.

Simon had previously tried to buy Taubman as well as mall owner Macerich.

Kraft Heinz Co., the iconic food giant created in a merger five years ago, was downgraded to junk by two credit raters, raising fresh worries among investors that a slowing economy could threaten the broader corporate bond market.

The packaged-food company was cut one level to BB+ by S&P Global Ratings, following Fitch Ratings earlier Friday. It will now become a so-called fallen angel, taking it out of investment-grade indexes.

Though Kraft Heinz, with just under $30 billion of debt, is a relatively small investment-grade issuer, it will become one of the top three in high yield. It’s just one of many companies that have wound up with a massive debt load as the result of deals, jeopardizing credit ratings in the process.

The food giant, created in a deal orchestrated by Warren Buffett and the private equity firm 3G Capital, is in the midst of a turnaround as its brands fall out of favor with consumers. It reported a drop in fourth-quarter sales Thursday that sent its bonds and stock tumbling, the latest sign that the company’s turnaround plan still has a long way to go.

“Kraft is to investment grade as Velveeta is to cheese,” said Christian Hoffmann, a portfolio manager at Thornburg Investment Management. “The ingredients dictate what something is and Kraft Heinz is junk.”

Profit Margins

That assessment is a far cry from the days of the merger when 3G went on a high-profile cost-cutting spree that was expected to eventually produce fatter profit margins. Instead, Kraft Heinz was left with a stable of tired brands and few new products that could appeal to consumers’ preference for more natural and less processed foods. Last year, it wrote down the value of its brand portfolio by more than $15 billion.

The turmoil has been a headache for Buffett’s Berkshire Hathaway Inc., whose stake over the past year has fallen to about $8.9 billion, down from $14 billion at the end of 2018. The stock was one of the worst performers last year.

S&P and Fitch cut the company one level to their highest junk rating. Kraft Heinz debt is already on the way to trading like junk. Its bonds due 2029 now yield about 3.5%, compared to the 2.88% for the average BBB company with similar duration. It’s the worst-performing issuer in both the U.S. and European markets Friday, and the cost to protect its debt against default has spiked to levels last seen in October.

Fitch said Kraft Heinz may need to divest a sizable portion of its business in order to reduce debt. Kraft Heinz also needs to cut its dividend, Fitch said in August, but the company said Thursday it would maintain the annual $2 billion payout to shareholders. Fitch maintains a stable outlook, while S&P’s is negative. Moody’s rates the company one step above junk with a negative outlook as of Friday.

“We believe it’s important to Kraft Heinz shareholders to maintain our dividend during this time of transformation,” Michael Mullen, a spokesman for the company, said in an emailed statement earlier Friday. Kraft Heinz remains committed to reducing leverage “over time,” he said. The company plans to release a more detailed turnaround plan around the time of its next earnings report in early May.

Kraft Heinz was one of many companies with BBB ratings, the lowest level of investment grade, which now comprises half of the broader $5.9 trillion market. It’s grown steadily since the financial crisis, as a decade of low interest rates prompted companies to load up on debt for mergers and acquisitions, often at the expense of credit ratings.

UBS Group AG strategists led by Matthew Mish predict there could be as much as $90 billion of investment-grade debt to fall to high yield this year. That compares to just under $22 billion in 2019, close to a 20-year low, according to Bank of America Corp. strategists.

But a wave of fallen angels, which some investors fear, has yet to follow. Many strategists contend that BBB companies have the ability to defend their investment-grade ratings, whether by selling assets or cutting dividends. Companies like General Electric Co. and AT&T Inc. have done just that to stave off downgrades.