This Yummy Stock Does it Right

03/16/2012 10:30 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

As spring creeps across the country and golf season gets underway, remember there are lessons to be learned about investing while you're approaching the green with a long iron, writes Paul Goodwin of Cabot Wealth Advisory.

Golf and growth investing are incredibly similar in all the important ways.

If you're going to be good at growth investing, you need to work at it. You need to spend time on it, take lessons and be prepared to learn all the little maxims and rules.

And, like golf, to be really successful you need to do everything right—find stocks with good fundamentals, strong stories, and attractive charts, pick the right time to buy, and know when to average up in your holdings and how to sell at the most advantageous time. And you need to know when the weather is so bad that it's not worth playing.

And also like golf, you won't always be successful. Sometimes you think you have the perfect stock, and then its earnings report disappoints, or the company gets investigated for backdating options, or an analyst downgrades it. You'll get punished for buying too high or holding on too long in a decline. A mutual-fund manager whose decisions are right 51% of the time is a hero in the industry.

If you can't tolerate failure, you can't enjoy either golf or investing. Both will keep you humble.

And finally growth investing, like golf, can be a lot of fun. Guessing right on a stock and watching its price climb the chart can give you a thrill that some people only get from a winning lottery ticket or having their scale tell them they've lost five pounds. If the only thing investors cared about was never losing money, they'd all buy nothing but US Treasury bonds.

And speaking of taking measured risks to unleash new opportunities. My feature stock today is a prime example.

Yum! Brands (YUM), besides being one of only two companies I know that uses an exclamation point in its name, is a powerhouse in the quick-service and casual dining restaurant business. Yum's KFC, Taco Bell, and Pizza Hut brands are all well-known in the US and around the world, with around 37,000 restaurants in 120 countries and territories.

Three things really impress me about Yum! Brands:

  • First, the company was the first quick-service restaurant chain to take on the challenge of China. Pizza Hut is now the top casual dining chain in China, with more than 560 outlets in over 120 cities. And KFC, with significant menu additions to address Chinese tastes, is the number one quick-service restaurant brand in China.
  • Second, the company has been active in concentrating on its strengths. This was evident from Yum!'s sale of the Long John Silvers and A&W All-American Food brands in December 2011. There was nothing wrong with either of those chains, but the three brands it retained are stronger. The company's focus on Asia, which is its strongest growth market, is also apparent in its acquisition of Little Sheep, a Chinese chain of hot-pot restaurants. Clearly, Yum!'s management realizes the significance of its 13% gain in same-store sales in China in Q1.
  • Third, YUM (the stock) has registered ten straight weeks of advancing stock price, which is a remarkable achievement in itself. The pace of price appreciation in YUM is low, but any stock that can string together ten weeks without a pullback is on a roll, no matter how slow the advance is.

Yum! Brands has the global breadth to cushion a pullback in any national market. But it's banking on its Chinese operations—which delivered 36% of 2011 revenue—to keep delivering growth. The stock's 1.7% forward annual dividend yield is also attractive.

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