Chart of the Day – Is $YUM Fried Chicken, or Just Heating Up?

by Enis December 11, 2013 7:47 am • Commentary

YUM stock has been on a roller coaster ride over the past 2 months, since its October earnings report.  The stock missed earnings, dropping 7% to a 5 month low after the results.  But after the selling subsided and the news flow stopped in YUM, the stock started to inch high day after day, starting in late October.

In retrospect, the earnings-related selling was a selling washout, with few sellers left to offer stock to willing buyers in the weeks that followed.  In a very impressive show of technical strength, YUM actually broke out to a new all-time high in late November, breaching the crucial $75 resistance level that had held since early 2012.

After so many months of consolidation, I would have expected that break higher to have more staying power, especially since the broader market environment has been favorable too.  But YUM broke back down below $75 last week, spending less than 10 trading days above that level (circled in green):

YUM daily chart, Courtesy of Bloomberg
YUM daily chart, Courtesy of Bloomberg

In the meantime, no real fundamental developments have taken place since the earnings report.  The stock broke out on an analyst upgrade at DB, which is hardly noteworthy in the big scheme of the company.  The price action is a good example of the short-term dominance of technicals, psychology, and buying and selling pressure, with fundamentals only playing a subtle tune in the background of the arena.

We actually like YUM on the long side from a valuation perspective, as we wrote in our earnings preview about 2 months ago:

This is one of the better-valued stocks in the restaurant space.  If YUM shows progress on the Chinese turnaround, then we see the potential for a breakout to new all-time highs in the next few months.  We might look for a way to participate that does not leave us exposed to decay.

We missed a good opportunity to get long YUM after the earnings selloff, though we debated the right entry point and structure amongst ourselves when the stock was trading in the mid-60’s.  The stock’s long-term failed breakout has made us a bit less enthusiastic about playing for a significant future upside move.  YUM’s favorable valuation and consistent long-term business execution does keep us of the view that the downside is relatively limited, though.  We might be on the prowl for yield capture strategies with a slight bullish bias in future situations where the stock gets oversold.