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Smart Money Says This Is Why You Should Bet on Yum! Brands Inc. (YUM)

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Yum! Brands Inc. (NYSE:YUM) is one of the largest restaurant companies in the world, with more than 41,000 restaurants around the globe. The company, which was spun-off from Pepsico Inc. (NYSE:PEP) back in 1997, has become a truly global company that operates three renowned restaurant brands: KFC, Pizza Hut, and Taco Bell. Moreover, Yum! Brands is one of the favorite stocks among the hedge funds tracked by Insider Monkey, with 59 investors owning the stock at the end of the second quarter, up by 14 quarter-over-quarter. Similarly, the value of the overall investments in this stock more than doubled during the three-month period, increasing to $4.06 billion from $1.49 billion. In the following article we will discuss a reflection on the stock from one of Yum! Brands’ largest shareholders, and give a brief overview of the company’s recent developments.

Yum! Brands, Inc. (YUM), NYSE:YUM, Yahoo Finance,

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 36 months and outperformed the S&P 500 Index by over 60 percentage points (see the details here).

Getting back to our discussion on Yum! Brands, Daniel Loeb’s Third Point represents the second-largest equity holder of the company at the end of the recent quarter of those investors we monitor, holding an ownership stake of 3.58 million shares valued at $322.04 million at that time. The investment management firm initiated a position in the second-largest global quick service restaurant company in the first quarter of 2015, but also boosted its stake in the company by 9% during the second quarter. It is also worth mentioning that the position accounted for 3.01% of the fund’s portfolio value at the end of June. Daniel Loeb’s letter to investors covering the first quarter discussed the reasoning behind going long on Yum! Brands. Third Point’s “squad” initiated the position on their view that:

“the company was in the early stages of turning the page on recent troubles in its Chinese business. We believe this development should neutralize the largest overhang on the stock, set the stage for a dramatic profit recovery over the next 12-24 months, and change the public market narrative around long-term shareholder value-creation for the company.”

Dan Loeb
Dan Loeb
Third Point

Let us remind you that Yum! Brands Inc. (NYSE:YUM) was involved in a food safety scandal last year, which seriously impacted the company’s profitability and top-line in the quarters following it. Shanghai Husi Food Co, which used to supply KFC and McDonald’s Corp. (NYSE:MCD)’s restaurants in the Shanghai area, was found to be placing new labels on expired meat and was also shown in a TV report reusing meat that had fallen to the floor. It appears that the company’s financial figures continue to be impacted by the scandal last year, as Yum reported that sales in China declined by 4% during the second quarter. However, this represents a major improvement compared to the first quarter, when the company’s same-sale stores in China dropped by 12%.

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