Bill Gunderson

“It makes perfect sense to expand a program that's working well in California, Arizona and Michigan, enabling the homeless, elderly and disabled to purchase prepared meals with SNAP benefits in a restaurant environment just as they can purchase ingredients in a supermarket.” A spokesman for YUM! Brands.


There are a lot of lessons to be learned from the craziness that’s going on in the market right now. And we’re going to take a look at the facts as they present themselves at the current moment.

We are finally starting to see some of the leading stocks begin to rollover a bit as are now in earnings season.

Last week was the kick-off of earnings season. Several big companies reported earnings: Alcoa (AA), YUM! Brands (YUM), J P Morgan (JPM), and Wells Fargo (WFC) were the biggest ones.

So I thought this would be a good time to analyze the company that deals with the four food groups here in America: fried chicken, pizza, root beer, and tacos—don’t tell me you never eat this stuff! We’re talking about YUM, the owner of KFC, Pizza Hut, Taco Bell, Long John Silvesr, A&W, etc.

Data From Best Stocks Now App

Analysts were expecting this quarter’s earnings of $0.93 per share on the stock. Well Yum reported last week and they fell short. Am I surprised? No, and here’s why.

Last week on my daily radio show, I once again went through all of the numbers on stockS that I personally require. My Best Stocks Now™ app requires that a stock first is a superior performer in the long term, intermediate term, and short term. NO laggards allowed!

Second, the stock must makes sense from a valuation point of view. In other words, there has to be justification for the stock going considerably higher over the next three to five years, no exceptions!

And thirdly, a stock has to have a healthy, vibrant stock chart. None of this sideways or sloping downward business (this is why I never bought Apple all the way DOWN from 705 down to 385).

Now let’s look at the analysis I did of YUM! Brands recently before they reported earnings last week, so you can see why I am not surprised that YUM fell short.

Performance

Data from Best Stocks Now App

How has the stock performed over the years? Well, not too bad; YUM! happens to be one of the better-run franchises around! Over the past ten years YUM! has been doubling your money about every four years. That's an average of almost 18% returns—this is pretty good.

Over the last five years YUM! has delivered 22% per year. This has handily beat the returns of the S&P 500 during that same period of time.

Over the past three years it has delivered an average of 14.5% per year. This barely beats the average market return of 13.5% per year. This stock has been becoming more and more of an average stock recently as it get bigger in size.

When I compare the long-term and intermediate-term returns of YUM, and compare it against the other 3,569 stocks that I track, it gets a performance grade of B+.

Here's my biggest problem with the stock lately, however. YUM has SEVERELY underperformed the market over the last twelve months! Look at the numbers for yourself.

YUM’s momentum has been terrible. It has badly unperformed the market over the last year. In fact the stock is down 2.3% over the last twelve months, while the market is up 18.9%. So it gets a momentum grade of D-.

Valuation

Maybe a very attractive valuation on the shares can save the day?

Data from Best Stocks Now App

The shares are currently trading at 18.5 times forward earnings with an expected five year annual growth rate of 11%. The shares are trading at a fairly large PREMIUM to its growth rate. This shows up in the PEG ratio of 1.66.

When I extrapolate out the current earnings estimates over the next five years and apply a reasonable multiple, I do come up with a fairly attractive five-year target price-BUT I REQUIRE PERFORMANCE AND VALUE! YUM falls flat on its performance.

Stock Chart

Lastly, as a professional money manager, I require a vibrant and healthy stock chart…

This is about as dull of a technical pattern as you can find in this current BULL MARKET. Why would I want to have my money tied up in this dud, when large cap stock like EOG, NFLX, PCLN, etc. are breaking out all over the place?

The bottom line is this: YUM! Brands was dead money before they reported earnings. Now it is REALLY dead money.

Here is another point that I would like to make. I hear some investors say ‘Don’t get sore, buy some more.’ This is averaging down—it is a cardinal sin in my book to buy more of a stock that just reported bad news.

When a stock or a company has lost the momentum that has been driving it higher, it’s very difficult to get it back, and if they don’t have it, you want to avoid the stock.

So let’s recap.

YUM has good performance in the long-term but not in the short term.

The valuation of YUM is an A-, which isn’t too bad, but it also has a high PEG ratio that I do not like.

Thirdly, I do not like YUM’s stock chart at all.

Out of the 3,570 stocks in my database, YUM comes in at #1,510. Let’s focus on the top 200-300 and leave the duds alone. This continues to be a raging Bull market that has taken the S&P 500 from 660 to 1700!

This Bull will not last forever, however. It is important to take advantage of the stocks that are working in this current market and leaves the ones that are not alone.

Data from Best Stocks Now App

Follow me on Twitter @Bill Gunderson or on my website www. Pwstreet.com for a change in my opinion of the stock.


Bill Gunderson

Bill Gunderson is the CEO and Chief Market Strategist of Gunderson Capital Managment in San Diego, CA. He is also a professional money manager, former research analyst, author of Best Stocks Now. http://www.pwstreet.com