Has Yum Bitten Off More Than It Can Chew in China?

Yum! Brands, Inc. was the third most popular restaurant stock among hedge funds in the third quarter of 2012 (see the rest of the top ten); it had actually been the most popular stock in Q1 before funds and other notable investors began to pull out. Billionaire Steve Cohen’s SAC Capital Advisors increased its stake by 55% to a total of 1.5 million shares (check out Cohen’s stock picks). Chilton Investment Company, managed by fellow billionaire Richard Chilton, reported a position of about 640,000 shares (find Chilton’s favorite stocks). Another major holder of the stock was Donald Chiboucis’s Columbus Circle Investors, which reported a position of 1.6 million shares. McDonald’s, Chipotle, Domino’s, and Buffalo Wild Wings were also among hedge funds’ favorite restaurant stocks.

Quick service restaurants, including Yum, are currently at too high valuations to really get a value investor excited about any particular stock. While Yum is cheaper than some of its peers, consumer tastes seem to be shifting towards more premium offerings and these other restaurants are in some cases showing good growth rates. The China exposure, which for some time was seen as a strength for Yum, is now looking even more like it could cause problems going forward.