This Delicious Stock Is Easy to Spot

02/08/2012 7:15 am EST


Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Wealth Network

There are plenty of ways to pick stocks, but when it comes to finding good growth stocks, it comes down to finding good companies that have a strong business model with plenty of growth opportunities, writes Paul Goodwin of Cabot Wealth Advisory.

Kurt Vonnegut, the late, great (and fairly cynical) fiction writer, actually incorporated a unique stock-picking system in his early book The Sirens of Titan.

In the book, a character named Noel Constant builds a huge fortune by investing in stocks that he picks because their ticker symbols match the letters that form the words of the Bible. His first investment was a stock called International Nitrate. His last was Sonnyboy Oil, which he chose because "SO" formed the last word of Genesis 1:16.

International Nitrate and Sonnyboy Oil don’t exist, of course. IN is the symbol for Intermec, a tech company in Washington State. SO is the trading symbol of a Georgia energy company called Southern Company.

But the idea that symbols ought to have some kind of power is a popular notion. I imagine the number of parents and grandparents who buy lottery tickets based on their offspring’s birth dates is enormous. (Personally, I prefer the numbers that appear on the slips inside Chinese fortune cookies, but they haven’t produced the big win yet.)

I also haven’t bought any Procter & Gamble (PG), even though its trading symbol matches my initials. I’ve been tempted by Chipotle Mexican Grill (CMG), whose symbol happens to be my wife’s initials, but not because of that. Chipotle is just a good growth company.

Anyhow, I’ve been fascinated by the symbols that represent companies on stock tickers and I thought I’d do a little research and report my findings.

It turns out that companies can choose their own trading symbols, which should make for some interesting meetings around the Board of Directors’ table. Those thinking about listing on the Nasdaq can reserve up to three symbols up to two years in advance.

I would have thought that single-letter symbols would be hugely popular, but it turns out that there are seven single letters (H, I, J, P, U, W, and Z) that aren’t in use. U used to be the symbol for US Airways until its bankruptcy in 2002.

Plus, for every single-letter symbol that represents a grand old company (F for Ford, K for Kellogg, X for US Steel), there are others that aren’t that familiar. (What do you know about Eni SpA that trades under E, or the Realty Income Corp., which uses O?)

C used to be Chrysler, now it’s Citigroup. Gillette used to have G, which now represents Genpact. Sears Roebuck was once R, but now R is Ryder System.

Some symbols just feel right. I’m sure Randgold Resources is quite happy to trade under GOLD, and AU is periodically correct for Anglogold Ashanti. But who decided that SXC Health Solutions was SXCI? And wasn’t there anyone to warn Tongxin International that TXIC was a little too close to toxic?

Your chosen stock can be FREE, HOT, HIT, BIG, BEST, REAL, or GOOD. It can be medical like MD, RX, or, in the spirit of overkill, MDRX. You can trade a CAT, DOG, COW or DEER, but not many other animals. You can even buy NFL or MLB.

And I’m sure a sufficiently creative person could write a story using only stock symbols, as someone did with California vanity plates a few years back. But it won’t be me.

In this vein is today’s stock pick.

It’s hard for growth investors like me to look outside the hyperactive world of growth stocks, but it does happen occasionally. And Yum! Brands (YUM), a Kentucky-based restaurant franchiser that specializes in quick-service food, is definitely catching my eye.

Yum! has nearly 38,000 restaurants in its various chains, including KFC, Pizza Hut, and Long John Silver’s. The company has gotten lots of ink about the popularity of its KFC brand in China, and that’s a big driver of continuing growth. I’m always interested in companies that have built national presences in China, whether they’re Chinese-owned or not.

That growth is quietly impressive, with a recovery from the four quarters of declining revenue in 2009 (hardly a surprise) to six quarters of single-digit growth through the second quarter of 2011, and then a 14% jump in the third quarter. Impressively, earnings increased steadily even during the 2009 slump, and the most-recent four quarters have shown gains of 26% (Q4 2010), 7%, 14%, and 14% (Q3 2011).

Yum! took a huge haircut ($40 in September 2008 to $22 that November), but has made steady progress since then. The stock surges and bases, but its corrections are generally mild.

After a correction from $58 last July to a double bottom at $47 in August and October, the stock has pushed ahead to $63, establishing it as a clear choice for investors seeking steady growth and a little income in the form of a 1.8% forward dividend rate.

Except for an occasional bite of the chicken at KFC, I don’t visit the restaurants that are under the Yum! umbrella very often. But I know value when I see it, and Yum!—even with its current P/E ratio of 23—should continue to prove attractive to investors with longer-term horizons.

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