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Ugly Yum China Stock Is Likely to Fall Further

Josh Enomoto

If 2017 was the year of Chinese investments, 2018 appears their comeuppance. On Tuesday, Yum China (NYSE:YUMC) became one of the markets’ worst performers, with its shares sinking more than 13%. Since its January opener, Yum China stock has given up more than 18% in equity value.

What accounted for the steep loss? As InvestorPlace writer Karl Utermohlen reported, a company that previously expressed interest in buying out YUMC stock apparently reneged on the idea. The firm in question, Hillhouse Capital, initially sought exposure to the rapidly growing fast-food market in China.

Yum China operates popular brands such as Pizza Hut, KFC and Taco Bell in the world’s second-largest economy.

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Although the concept sounds intriguing, and more importantly profitable, that’s not the reality. In many ways, 2017 was a “relief year” in that President Trump appeared to back away from his more controversial ideas. But this year, many of the concerns the electorate had toward a Trump administration are turning true.

A significant one is U.S.-China relations. For the longest time, the American government and its institutions ignored Chinese misconducts for a very simple reason: money. With the world’s biggest population and an economy shifting toward technological advancements, China was a cash cow for multiple industries.

The name of the game was see no evil, hear no evil. That doesn’t fly with Trump, who is anything but soft-spoken. He lashed out aggressively against the Chinese, who typically hate losing face. Long story short, with our current President, conflict was inevitable.

Unfortunately, this scared off Hillhouse Capital from pulling the trigger on Yum China stock. The political fallout not only impacted YUMC, but powerhouse names like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY).

But if you’re thinking about going contrarian on YUMC stock, don’t. Here’s why.

Yum China Stock Is Fundamentally Flawed

Certainly, I can understand the temptation to gamble on Yum China stock. Last year, the Yum! Brands (NYSE:YUM) spinoff returned over 51% for shareholders. It’s now given up a significant chunk of those profits.

Having acknowledged that discount, I firmly believe we must consider the broader context. Yum China stock was mired in a severely bearish trend channel. Rumors about the Hillhouse buyout buoyed shares. Now that this idea is off the table, and other suitors unlikely to materialize, YUMC is likely to endure further pain in the nearer term.

What many investors may find surprising is that the company’s growth prospects have flatlined for years. In 2014, YUMC pulled in $6.93 billion in revenues. This figure actually declined over the next two years until 2017, when the fast-food brand hauled in $7.1 billion. But this is only an extremely pedestrian 3% improvement.

YUMC stock just hasn’t caught on with bullish sentiment toward rival Chinese investments. Now, this circumstance became significantly more challenging.

The central issue is that the Chinese love American exports; they just don’t necessarily like our culinary “contributions.” Don’t get me wrong. Iconic Americana like McDonald’s (NYSE:MCD) remain popular fixtures in China. But after the novelty effect wore off, Chinese consumers are gravitating toward healthier food and their own cultural offerings.

The hard numbers provide the sad truth for Yum China stock. By an overwhelming margin, Chinese consumers prefer — surprise, surprise! — Chinese food. Given that we’re in a heated conflict with the Asian giant, nationalistic sentiment might make this margin even wider.

It’s no wonder why McDonald’s has divested large chunks of its business in China. Forget the politics; the consumer base just doesn’t care for the products.

YUMC Stock Flashing Warning Signs

If you’re still unsure about YUMC stock, just take a look at its technical chart. I don’t think you can draw an uglier chart.

Currently, Yum China stock is stuck in no man’s land. In a single day, shares dropped through all kinds of support levels. Now, it’s just hanging on by a thread. Since no substantively positive news exists, that thread can be cut easily.

Of course, if you’re still insistent on going contrarian, I’d simply wait. Yum China stock isn’t a train wreck like other stocks suffering steep declines. For instance, the company features a very strong balance sheet.

The issue is that again, the growth story is terrible. Therefore, it doesn’t deserve the multiples for which it currently trades. Wait until the volatility really hurts, as in somewhere well below $30. For everyone else, I’d steer clear of YUMC stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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