Monday’s session was down and out from the opening bell, closing on the lows of the day. The primary reason, supposedly, was renewed fears of economic problems in Europe, specifically emanating from Spain. These European scares are like bad reruns of That 70s Show on Nick at Nite – as much as you are tired of it, they keep replaying it. Here’s my take. The market needed a reason to back off and what a better day than a Monday (the only day of the week which is historically negative on average) with Europe greasing the skids for the US to slide.
I previewed Yum Brands (YUM) earnings report on Bloomberg Radio yesterday afternoon. The bottom line was my recommendation to avoid YUM as the stock was too pricey and the company was likely to guide to disappointing earnings growth for 2013. I expected that Yum was going to face a weak 2013 in a similar manner to the challenging year that McDonald’s (MCD) experienced in 2012.That was indeed what occurred. However, it was worse than I expected. Contributing to Yum Brands’ problems was a scandal involving its chicken supply chain in China. The stock dropped nearly $3.50 following the earnings announcement after declining nearly $2.00 in the regular session. Here is where it gets interesting. I purchased McDonald’s shares on the day of a mad cow disease scare in December 2003 when everyone was worried that the company’s supply chain was tainted. That marked a low in the stock’s price. Panic is setting in for Yum Brands stock. It may last a while longer for Yum in 2013 than it did for McDonald’s in 2003. YUM management is being proactive with damage control on this issue, although, it is complicated by the fact that the problem resides in China. Be prepared to step up and buy Yum Brands stock when the price is right. Be patient as that right price is in the mid-40s to low-50s.
As for today, I am expecting that the markets will firm up. From the ashes of sell-off Monday could come turnaround Tuesday.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long MCD stock — although positions can change at any time.
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant and agricultural stocks. You can subscribe at www.restaurantstox.com
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