Reaction to China Is Overdone, But Not When It Comes To YUM!

I don’t know about you, but this obsession with China when it comes to the gyrations of the U.S. stock market is becoming a little tiresome to me. I understand that it is the world’s second largest economy and that weakness there could have a knock-on effect elsewhere, but for the fate of the U.S. stock market, and even companies that have no exposure to the Chinese market, to hang on every data point from Beijing is ridiculous. It is increasingly looking like China is just an excuse for an understandable correction from all-time highs rather than an actual driver of prices.

That said, there are some U.S. stocks that will suffer if, as looks likely, China does experience a period of reduced growth. The economy there would still be growing, but at a slower pace than is priced into some stock and it is the performance relative to expectations that matters here. For many, Apple (AAPL) is high on that list of companies that could be hurt, but that is an exceptional circumstance.

For years Apple was slammed by its critics for not performing in the Chinese market, and then in the Q3 earnings released in July revenues from that market surged over 100 percent. Chinese economic growth, or the lack of it, is now used by those same critics as a reason to avoid the stock. What Apple has shown in the past in other markets, however, is that once their products take off they can perform beyond most expectations in individual markets regardless of broader economic conditions. Now that relationships with mobile carriers are settled, that is likely to be the case here as well, and as tales of the driverless car indicate, Apple is not dependent upon one region or product to continue growing.

Therefore, I am not too worried about Apple. The other U.S. stock that is frequently mentioned when it comes to China, however, is a different matter. I have, in the past, been bullish on YUM! Brands (YUM) despite the incredibly annoying exclamation point in the company’s name. The stock got heavily punished for a food scare last year; so much so that the stock looked extremely cheap. The effects of that scare on sales, however, have lingered and slowing growth will just add to the problems.

Over 50 percent of YUM’s revenue comes from China and their sales there are less resistant to an economic slowdown than they would be back home. As hard as it is for some to imagine, KFC has been seen as somewhat of an aspirational brand in China, and as a luxury would be an early casualty of a reduction, not just in growth but also in consumer confidence.

There has been a lot of buzz this week about the implementation of a policy at Taco Bell of serving alcohol in some select stores in North America and I am sure that that will help sales there somewhat, but Taco Bell hasn’t been the problem. Sales at the Mexican food chain have been increasing for a couple of quarters thanks to breakfast items and other initiatives, but Taco Bell accounts for only a fraction of U.S. revenue, which in turn accounts for less than 30 percent of YUM!’s total sales. The move is interesting, but may not be enough to offset weakness elsewhere.

It is likely that over the next few weeks, the focus on China will fade away when it comes to the market in general. With another Fed meeting fast approaching and the possibility of a government shutdown here in the U.S., there will be plenty of other things to worry about. Assuming that those things too shall pass and that this is just a period of needed and healthy correction, then buying or holding onto YUM makes no sense. If there is to be a general recovery in the domestic market, why hold the stock most vulnerable to even a soft landing in China? There will almost certainly be better uses for your money.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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