Part 4

Yum! Brands

Company Background

Yum! Brands, Inc., based in Louisville, Kentucky, has over 50,000 restaurants in more than 150 countries and territories primarily operating the company’s restaurant brands – KFC, Pizza Hut and Taco Bell – global leaders of the chicken, pizza and Mexican-style food categories. The Company’s family of brands also includes The Habit Burger Grill, a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. In 2019, Yum! Brands was named to the Dow Jones Sustainability North America Index and in 2020, the company ranked among the top 100 Best Corporate Citizens by 3BL Media.

The company is putting a lot of efforts in building the world’s most loved, trusted, and fastest-growing restaurant brands in partnership with the best franchise operators in the business. They are constantly evolving KFC, Pizza Hut Taco Bell and The Habit Burger Grill from places to eat into iconic, distinctive and relevant global brands.

Considering the fact that Yum! Brands is the owner of America’s most favorite and regularly visited places to eat out and that the US economy is in the process of reopening and going back to normal we believe that these are two very powerful tailwinds for the company moving forward. People can’t wait to go out and enjoy a good meal with their friends and family after being literally stuck inside for over a year eating on the couch. It doesn’t take an MBA to find out that KFC, Pizza Hut and Taco Bell are expected to witness an incredible demand coming their way, which will definitely translate into higher revenues and earnings going into Q2 and Q3.

Current position – Financial Performance and Future Growth Prospects

Well, it’s quite obvious that the restaurant industry was among the hardest hit sections of the economy due to the COVID-19 pandemic. Yum Brands was no exception as, the company and its franchisees experienced store closures, reduced store-level operations, including lesser operating hours and dining-room closures. To make things even worse, restaurant traffic in general has been significantly impacted due to the social-distancing protocols. However, the good thing about investing in iconic brands and businesses with long and successful track record and remarkable management teams is that they always find a way to survive and come out of the difficult period even stronger. That is exactly what Yum Brands has been working hard on throughout the last 12 months. The company has spent continuous efforts on building more off-premise channels, making strategic investments in digital technology and remodeling its franchise business, which are all expected to aid the company going forward. Additionally, the company has introduced various digital features in mobile and online platforms across all of its brand segments tin order to enhance guest experience.

As part of the digital wave in the US fast-food restaurant sector, Yum! Brands is continuing the transformation process toward a single point-of-sale system in the United States. In addition to that, it updated its mobile app and Hut Rewards. The thing that will really help the company to successfully complete this digital transition and move forward is the remarkable brand awareness and customer loyalty that Yum Brands has developed throughout the years, as it currently has more than 12 million active users in its loyalty program.

The senior management of the company has recognized the importance of delivery in this new market environment, thus Yum! Brands has established a very valuable partnership with the online food delivery platform Grubhub, which will definitely serve as a positive catalyst for strong online sales and deliveries from its restaurants. At the end of fourth-quarter 2020, the company had more than 35,000 restaurants offering delivery globally, up 16% year over year. In 2020, digital sales were reported at $17 billion, suggesting a 45% increase over the prior year.

The other major step that Yum! Brands has undertaken in recent years is basically a de-risking strategy of reducing its ownership of restaurants through the refranchising model. The model basically focuses on franchising already existing restaurants to individuals and companies who are interested in managing and growing them in the future. This is a model that one of Yum! Brand’s biggest rivals, McDonalds, has been following for years. The reason why this model is something that such companies are going after is associated few key benefits like reducing the asset-management costs and lowering the burden of managing all of these different locations, while also increasing its profit margins and long-term growth capacity. Although, re-franchising weighs on near-term revenues, we note that refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and ROE expansion over the long term.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 13 months taking the price from the March 23rd, 2020 around $54 to the $122 all-time highs in the beginning of May, 2021. This represented an astonishing 126% gain for the stock in a year. However, the road to the above-mentioned all-time highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few massive 15-20% corrective movements that took place in the first part of the bull run, but then the volatility in the stock went down and the rest of the corrections that we observed during this strong uptrend were in the range of 7-10%. However, the important thing is that the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ attention as it remains one of the leaders in the Retail-Restaurants sector. The way that Yum! Brands has managed to evolve from a company owning few fast-food restaurants into a worldwide leader in fast-food dining with some of the most loved and recognized brands, has turned the stock into a go-to choice for both small retail and large institutional investors looking to add some consumer discretionary exposure to their portfolios.

We will start buying the stock between around the $115 support area. Should the price drop further in the short-term, we would be buying even more aggressively at the next strong support at $105-110 where more buying pressure is expected and it would give us a chance to get a better average price on our long positions. Our initial profit-taking target is set at $135, followed by the next target at $145 where we would be fully cashing in our profits.

The stock is currently sitting at $121 per share, which is right in line with the all-time highs of $122 per share. We saw that the stock found a lot of buying interest around the $100-105 support zone, on two separate occasions since the beginning of the year – once in the beginning of February and once in the beginning of March. The confluence of the horizontal, diagonal and 100 DMA dynamic support lines there has continued to bring a lot of buyers back to the market every time the price drops there. In the aftermath of the Q1 earnings call the stock shot upwards as the company beat the earnings consensus estimates with over 25%. Smart investors positioned themselves before the quarterly results were announced as the stock was sitting at the $115 mark then. The saw the opportunity to buy into one of the leaders in the retail-restaurants sector at a relatively low P/E and PEG valuation and of course didn’t think twice about it. The recent failure of the price to break below the $115 support back in late April and the subsequent sharp post-earnings price appreciation should be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is most likely here to stay and that investors should be expecting from the stock to reach new all-time highs in the coming weeks.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLY will be one of the best performing sector ETFs in May. We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Ebay Inc., has definitely been one of the biggest winners in terms of stock price appreciation throughout the last 12 months, thus we are strongly bullish on Ebay’s stock in both the short and long term. Additionally, we are seeing Yum! Brands as a great reopening play, due to the iconic restaurant brands that the company has under its umbrella. People are eager to go out, eat out, enjoy time with their friends, relatives and colleagues, thus locations like Pizza Hut and KFC are definitely going to see a strong revenue growth as a result of that. The most recent price appreciation should not be viewed as a missed opportunity to go long, but rather as a strong confirmation on the great growth momentum that YUM’s stock has at the moment. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already pushed into overbought territory, which is generally considered as a bearish sign, as it confirms that the stock has overextended to the upside. Thus, investors should be careful when purchasing the stock at these levels in the current environment and understand that a potential 5-10% correction could be coming in the near future. Does this mean that investors should be bearish on the stock? Definitely, not! The stock is a STRONG BUY and depending on your desired holding period and risk tolerance you could either open half of your position now and wait for a potential correction in order to add the rest or in case you are a more risk-oriented investor you could go ahead and open a full-sized position right away. In addition to that, it is important to note the fact that the XLY and the Consumer Discretionary sector as a whole would continue to attract a lot of the investors’ attention moving forward, as consumers are sitting on record levels of savings and are eager to spend. This makes us optimistic for the future performance of YUM as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of YUM with the large number of growth-related initiatives, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are not in a position to buy the stock at the desired 10% discount from the all-time high levels, we would like to point out that buying at these levels would be suitable for more risk-oriented, while risk-averse investors should wait for a 5-10% correction before opening their Longs. Thus, we are currently looking at the $110-115 range as a great accumulation zone for the stock. Our take profit levels in the coming months will be placed at $135 and $145 respectively.

ETSY Inc.

Headquartered out of Brooklyn, New York and founded back in 2005 ETSY has established itself as a leader in the handmade or vintage items and craft supplies segments of the ecommerce world.

Etsy is the global marketplace for unique and creative goods. It’s home to a universe of special, extraordinary items, from unique handcrafted pieces to vintage treasures.

In a time of increasing automation, Etsy has set out on a mission to keep human connection at the heart of commerce. That’s why they built a place where creativity lives and thrives because it’s powered by people. The company helps its community of sellers turn their ideas into successful businesses. Etsy’s platform connects them with millions of buyers looking for an alternative—something special with a human touch, for those moments in life that deserve imagination.

As a company, Etsy strives to lead with its guiding principles and to help spread ideas of sustainability and responsibility whose impact can reach far beyond Etsy’s own business.

Etsy has benefited greatly from the combination of accelerating Marketplace and Services revenues and the solid momentum across active sellers and buyers. Furthermore, as we know the coronavirus pandemic of 2020 has led to an incredible spike in all e-commerce activities including the sale of protective masks, which there are plenty of on Etsy. These are major tailwinds that have not only helped the company so far but will also continue to have a major positive impact on Etsy’s financial performance in the coming quarters.

Current position – Financial Performance & Future Growth Prospects

As we all know, 2020 was definitely a life changing year for many individuals as well as businesses out there. While some businesses had to shut doors and figure a way out to survive, others have truly benefited from the social distancing protocol, stay-at-home restriction and the rising fear of coming into contact with this highly contagious virus. Online retail shopping was by far one of the biggest winners in 2020 in terms of volumes, revenues and profits. In Q4 2020, Etsy’s active buyer base grew with 76.7% from the prior-year quarter to 81.9 million. It is true that there are a lot of online shopping platforms and many that are bigger than Etsy.com. However, the good thing about the online retail space is that it is available to everyone around the world who has access to the internet, which in turn means that there are enough clients for everybody. Furthermore, Etsy has managed to truly differentiate itself within the e-commerce space as the largest platform for handmade, original and unique products in the world. We believe that this will act as a long-term growth catalyst for both the company and the stock as there aren’t many true alternatives to what the company offers. Also, its rapidly growing sales with solid momentum across home improvements and home furnishings (top product category), jewelry and accessories, and craft supplies, remain a major positive. Our analysis shows that despite the fact that the economy is now reopened and people are eager to go out and spend, the positive behavioral trend towards online shopping will stay as a meaningful and reliable theme in the market for the years to come. Thus, we believe that Etsy has a great strategic position for capturing all of that interest and growing at a rapid pace in the future.

While the pandemic was sending millions of new clients to Etsy.com the company was not just enjoying the short-term benefits of higher volumes, but was rather looking for ways of improving som of their key growth areas like – search and discovery, customer liability, marketing, and seller tools and services. Furthermore, higher product investments, and innovations in personalization and customization of purchases continue have significantly improved the overall buyer experience Etsy’s platform. The company was quick to realize that it is not just about attracting new buyers and sellers to the platform, but rather it is about retaining these clients as long-term users. Few other key areas where the company has been performing well are: seller shipping promotions, performance-marketing and better customer service. All these endeavors are expected to aid the performance of Etsy, which has witnessed consistent growth in revenues in the past few years. Notably, the company’s revenues have registered a CAGR of 31.5% over the past four years.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months taking the price from the March 23rd, 2020 lows of around $30 to the $251 all-time highs in the beginning of March, 2021. This represented a whooping 737% gain for the stock in less than a year. However, the road to the above-mentioned all-time highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few massive 15-20% corrective movements that took place during this strong uptrend, but the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ attention as it remains one of the leaders in e-commerce. The way that Etsy has managed to evolve from a relatively small niche-based website to a worldwide commercial giant has turned the stock into a go-to choice for both small retail and large institutional investors looking to add some e-commerce exposure to their portfolios.

We will start buying the stock around the $150 support area. Should the price drop further in the short-term, we would be buying even more aggressively at the next strong support at $115 where more buying pressure is expected and it would give us a chance to get a better average price on our long positions. Our initial profit-taking target is set at $225, followed by the next target at $255 where we would be fully cashing in our profits.

The stock is currently sitting at $157 per share, which is roughly 37% below its all-time highs of $251 per share. We are expecting to see the stock finding a lot of buying interest around the $125-155 as the most recently reported financial results were better than the estimates on both the top and bottom line, which shows that the company continues to grow at an impressive rate. The confluence of the horizontal, 50 WMA and 100 WMA dynamic support lines there are also expected to bring a lot of buyers back to the market every time the price drops there. In the aftermath of the Q1 earnings call where the company delivered a very poor guidance for the upcoming quarter, certain investors saw that as a reason to start selling out of the stock in a full out panic mode. As you know and as we have mentioned many times before, panicking has never made anyone any money. While we understand that Etsy’s pricey valuation might not be suitable for all investors out there, it is important to remember that this is a high-growth stock, that continues to report remarkable numbers. The better growth opportunity that a certain stock represents, the more expensive it tends to be. Investors should see this as an opportunity to buy into one of the leaders in the e-commerce space at a 37% discount after a strong Q1 earnings report and shouldn’t think twice about it. We believe that the recent strong declines are heavily overdone and that the stock will find enough buying interest at the current levels. If we see a failure of the price to break below the $153 support in early May, then we could expect a sharp price appreciation taking the price back towards the $200 mark. Can the stock go lower? Of course it can.. any stock can go lower, but that is not the point. As a growth-oriented investor you have to be ready to take on some pain (stock price declines) from time to time when you are chasing after the high double-digit annual growth. Basically, this is the price you have to pay for owning these names. However, with the proper risk-management and portfolio positioning, this short-term speed bump could prove to be a phenomenal opportunity for generating outstanding profits in the months ahead.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLY will be one of the best performing sector ETFs in May. We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Etsy Inc., has definitely been one of the biggest winners in terms of stock price appreciation throughout the last 12 months, thus we are strongly bullish on Etsy’s stock in both the short and long term. Additionally, we are seeing Etsy as a great way of playing the e-commerce boom in a more niche-related way, as our analysis shows that the deeper the niche is, the more loyal the customer base is. The most recent price corrections should be treated as a great opportunity to buy this strong performing stock at a remarkable discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are now sitting deep into oversold territory, thus signaling that the uptrend might be returning pretty soon. In addition to that, it is important to note the fact that the XLY and the Consumer Discretionary sector as a whole would continue to attract a lot of the investors’ attention moving forward, as consumers are sitting on record levels of savings and are eager to spend. This makes us optimistic for the future performance of Etsy as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of Etsy with the large number of growth-related initiatives, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a 37% discount from the all-time high levels, we would like to point out that buying at these levels would be suitable for both risk-oriented and risk-averse investors. Thus, we are currently looking at the $125-155 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $225 and $255 respectively.

Sincerely,

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