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Monday, February 10, 2014 - 14:30
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Monday, February 10, 2014 - 14:30

Do You Own The #1 U.S. Company In China?

Monday, February 10, 2014 - 2:30pm

Many U.S. companies are riding the Chinese growth wave. However, to maximize their gains from these pioneering U.S. firms, investors still need to choose the right stocks and time their purchases correctly.

One of the best times to buy a stock is during a pullback resulting from investor bearishness. Many investors have turned bearish on China due to a slowdown in growth.

Catching long-term economic trends is one way in which fortunes are made in the financial markets, but identifying these macro trends at their beginning is very difficult.

Some investors luck into a long-term trend at its start by simply being at the right place at the right time -- but for the rest of us, it's not so easy. I've found the best way to catch massive trends like China's growth is to wait for a pullback within the broader upward trend.

With an economy that has been growing four to five times faster than the U.S.' over the past couple of decades, there is no question that China represents a massive opportunity for investors. Many economists expect China will overtake the United States as the world's largest economy within the next 10 years.

So while China's growth is indeed slowing, it remains on the growth fast track. In addition, despite being well entrenched in China, one pioneering U.S. company recently sustained a sharp pullback. This company's recent ills are likely past, so now is the perfect time to buy its stock as it retraces its way back to its highs and potentially beyond.

Flickr/Ronnie Macdonald
As China continues to grow, the Chinese people's desire for Western brands seems to be expanding right along with the economy -- as seen in the more than 4,500 KFCs across the nation.

The company behind fast-food brands like Pizza Hut, Taco Bell and KFC, Yum Brands (NYSE: YUM) owns the #1 foreign brand in China -- a fact that some investors might not be aware of. As China continues to grow, the Chinese people's desire for Western brands seems to be expanding right along with the economy -- as seen in the more than 4,500 KFCs across the nation. Yum also has more than 1,000 Pizza Huts in China, with plans to open 200 more this year.

However, despite Yum's success in building its brands in China, 2013 was an extremely difficult year for the company. Net profit plunged 32% from the year before, with a 15% drop in same-store sales at Chinese KFCs.

The plunge in KFC's Chinese performance was due primarily to fears about bird flu and reports of high levels of antibiotics being given to KFC's chickens. These factors resulted in dire earnings estimates for Yum: Earnings fell 5% in the fourth quarter, but this actually beat the estimates.

The anticipation for these numbers sent Yum shares plunging from around $77 at the start of the year to a low of $66 during the first week in February. Once the numbers were actually released, investors jumped on the beaten-down shares, which sent shares spiking.

A look at the technical picture shows shares have gapped up on the better-than-expected fourth quarter and strong 2014 guidance. The 200-day simple moving average should act as support and a stop level for long positions.

This rebound was a combination of a "buy the rumor, sell the fact" mindset and hugely positive 2014 guidance from Yum. The company calls 2014 a bounce-back year for the brands and vow to re-establish the KFC brand in China. Yum's CEO David Novak has pledged 20% EPS growth in 2014, which helped send YUM bouncing higher over the last few trading sessions.

Risks To Consider: Bird flu is a very real fear as new cases are continuing to be reported. Yum might consider launching a substantial marketing campaign to mitigate consumers fear by distancing the company from the issue. In addition, political risk is always a threat in China. Always be sure to use stop-loss orders and diversify when investing.

Action to Take --> China's growth story is just starting, and any short-term weakness in its economy should be thought of as a buying opportunity for pioneering U.S. companies in the Chinese market. Entering now in the $71 to $73 range with a nine-month target price on YUM of $78 and an initial stop-loss level of $70 makes solid sense -- and investors can collect a 2.1% dividend while they wait.

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David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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