Kraft Foods (KFT)

Milk, grain and energy prices are in a cyclical downturn within a secular bull market. This will fatten short term profit margins for Kraft.

As a food and beverage company, Kraft is relatively unaffected by economic cycles; its products have relatively inelastic demand. Although Kraft expected to see a significant decline in sales volume in the second quarter, volume fell just 1% despite a 7% increase in the company's prices.

Kraft is the largest packaged food company in North America and the second largest in the world, behind Nestle. The breadth of its product offerings makes it a key supplier for retailers.

Kraft Foods Inc. (KFT) has been selected to replace American International Group Inc. (AIG) in the Dow Jones Industrial Average. “When you think of a Dow stock, you think of a company with a stable, solid business model and an enduring franchise representative of the American economy. Kraft clearly fits that bill,” Christian Andreach, who helps oversee $18 billion at Manning & Napier Advisors in Fairport, New York, told Bloomberg News. “It should give the stock a short-term kick.”

New Dow components often get a short-term boost as fund managers purchase shares of the addition to rebalance portfolios that are managed against the index. Similarly, stocks that are replaced face downward price pressure as shares are sold.

Dow components are generally seen as the cream of the crop of the large-cap U.S. market. Kraft certainly fits the bill in terms of size with a market capitalization of $50 billion and sales of over $37 billion last year. But as a rather recent spin-off of former parent company Altria Group Inc. (MO), Kraft just doesn’t have the distinguished history of some of its new Dow peers.

Kraft's aggressive restructuring program will end in 2008, leaving the company leaner and meaner.

Kraft is one of Berkshire's largest holdings. When Berkshire purchases that large a position at today's dollars it means the stock is undervalued. Twenty years from now Kraft will have created gains for Berkshire just like Coca Cola did. Plus it will throw off huge dividends for other acquisitions. No one plays the buy and hold better than Warren Buffett.

Come on! This is a great stock with great leadership!