Investing 101: If a stock is priced for perfection, bad news is going to cause a rush for the exits. That definitely was happening with fast food giant Yum! Brands (YUM) on Friday.
Even though the company reaffirmed its outlook for 2013, investors were spooked by an alarming 4% decline in same-store sales in China. Yum has focused heavily on China, particularly through its KFC franchise.
Shares fell nearly 10%. An overreaction? Maybe not. Prior to the company's announcement late Thursday, Yum shares were trading at 20 times 2013 earnings forecasts. That is extremely expensive for a restaurant stock. McDonald's (MCD), by way of comparison, was trading at just 15 times profit estimates for next year.
The sell-off in Yum is a bit reminiscent of the recent slide in rival Chipotle (CMG), which competes with Yum's Taco Bell brand. Chipotle shares plummeted after its latest earnings report due to worries that sales were slowing. Like Yum, Chipotle was trading at a huge premium to Mickey D's and many other restaurant stocks.
But traders on StockTwits are more nervous about the Yum news because growth in China is critical to the company's continued success.
This is obviously not good. Making matters worse for Yum is the fact that China's woes may not be confined to just one quarter. There are growing concerns about the health of China's economy .. as one trader sarcastically points out.
Investors have to hope that China does avoid a hard landing. That's because the rest of the world is not looking too pretty either.
Still, some traders think that investors shouldn't panic. After all, China is just one part of the Yum story. Other franchises continue to do well. And Yum also pays a solid dividend.
That is a nice reality check there. Yum is still a solid company. But as I suggested before, shares may have been a little too pricey heading into its earnings report. The pullback may make the stock as appetizing as Top Chef Masters' Lorena Garcia's new Cantina Bell menu! ("Lose the tortilla!")
Finally, it's time for the Reader Comment of the Week. As a diehard Yankees and Giants fan, it pains me to praise a guy from Boston. But Chrisitan Koulichkov, aka BostonBroker33 on Twitter, wins his unprecedented third RCOTW award of 2012 for this gem about the recent rally in Research in Motion (RIMM) in response to Thursday's zombies of tech column.
Brilliant. This child of the 80s loved the reference ... even though the thought of decaf coffee makes this java snob cringe. Speaking of cringing, watch this hilarious Brim commercial.
It looks like David Einhorn's latest prediction may be coming true.
Shares of Chipotle Mexican Grill (CMG), which Einhorn recently recommended shorting, got slammed after the casual restaurant chain reported earnings that fell short of forecasts. And, although revenue was roughly in line with estimates, investors were disappointed.
Chipotle's stock sank more than 10% after-hours Thursday. On Friday, shares fell more than 15% before gaining back some ground.
I fortuitously bumped into Einhorn MOREMaureen Farrell - Oct 19, 2012 10:23 AM ET
Tuesday brings the unofficial start to third-quarter earnings season, with aluminum producer Alcoa (AA) and KFC-owner Yum Brands (YUM) reporting after the closing bell.
Alcoa is typically considered the kick-off to earnings since it's the first major Dow (INDU) component to report. It's also considered a bellwether of the economy because of its global reach.
But Yum may actually grab the spotlight because of its large presence in China, where report MORECatherine Tymkiw - Oct 9, 2012 11:55 AM ET
Hedge fund manager David Einhorn's newest short target: Chipotle Mexican Grill (CMG).
Greenlight Capital's Einhorn thinks Taco Bell, owned by Yum Brands (YUM), will eat Chipotle's lunch with its new Cantina-style menu.
Chipotle was one of four stocks that Einhorn discussed during his presentation at the Value Investing Congress in New York. He also spelled out a case for why investors should buy General Motors (GM) and health insurer Cigna (CI). MOREMaureen Farrell - Oct 2, 2012 12:56 PM ET
When you think about the 4th of July, fireworks, backyard barbecues and Tchaikovsky's "1812 Overture" (music with cannons!) probably come to mind. And thanks largely to ESPN, the gluttonous International Hot Dog Eating Contest down in Brooklyn's Coney Island has also become a national Independence Day tradition.
The contest has been going on since 1916 at the Nathan's Famous hot dog stand at the corner of Surf and Stillwell Avenues -- MOREPaul R. La Monica - Jul 2, 2012 9:44 AM ET
Will the third trip to the public markets be the charm for Burger King's investors?
Burger King (BKW) started trading on the New York Stock Exchange Wednesday, and the home of the Whopper quickly popped nearly 7% from its opening price of $14.50.
In early April, the world's second largest hamburger fast food chain announced a new healthier menu replete with salads, wraps and smoothies. (The new bacon sundae is a glaring MOREMaureen Farrell - Jun 20, 2012 10:54 AM ET
Fast food. Slow economy. Europe and China are starting to hurt McDonald's (MCD). And the fears of a China pullback have really weighed on Yum (YUM), whose KFC brand is huge in China. Still, some traders are still bullish on Happy Meals and the Colonel's Crispy Strips.
HedgeyeHWP: $MCD - "Europe posted a 2.9% increase in comparable sales for May driven by the U.K., Russia and Fr, partially offset by Germany" MOREPaul R. La Monica - Jun 8, 2012 2:53 PM ET
Shares of McDonald's and KFC-owner Yum! Brands declined Friday amid growing fears about slowing economic growth in China.
McDonald's announced that its sales at stores open at least a year in the Asia, the Middle East and Africa region declined 1.7% in May, with particular weakness in Japan and China.
In fact, sales in China declined for the first time since November 2009, said Lynne Collier, analyst at Sterne Agee. Collier said that her conversations MOREHibah Yousuf - Jun 8, 2012 12:36 PM ET
Not a member yet?Sign up now for a free account
|Internet giant Sina caught in China porn crackdown|
|Water becoming more valuable than gold|
|Don't assume you're safe from Heartbleed|
|Russia stocks fall as Ukraine crisis intensifies|
|Will 7 Apples a day keep the bears away? - The Buzz|