A funny thing happens every time there’s a discussion about $YUM Brands. They all feel the need to bring up China, like it’s the be-all and end-all for the future performance of this stock. And yes I get that the Chinese love their fried chicken and all that, which is great. But don’t confuse the company’s growth in that country with a correlation between YUM Brands and Chinese stocks. One has absolutely nothing to do with the other.
Here is a 4-year chart of $YUM comparing it with both the Shanghai Composite and the China 25 Index where foreign investors are allowed to participate. Look at YUM Brands absolutely crushing it while the Chinese Stock Market makes a living losing money for investors. This has been one of the worst areas in the entire world, but $YUM doesn’t seem to care one bit:
I think this chart tells a really interesting story that not many people are telling. So if you’re going to buy $YUM or if you’re planning on selling $YUM, don’t do it because of China. There are a lot of people that like to make up correlations because it sounds good on TV or in print. But more often than not, they don’t even run the numbers.
Over time, humans have evolved into a group that feels more comfortable in herds, whether for survival reasons thousands of years ago, to more ridiculous reasons in recent times. As market participants, I think it’s important to recognize this flaw of ours and try to take advantage of it as much as we can.
I thought this was an interesting comparison between YUM and China. Sure, in theory they should have some sort of positive correlation, but they don’t at all. It was the great philosopher Yogi Berra who once said,
“In theory there is no difference between theory and practice. In practice there is”
The math here is very simple. A correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation, and +1 indicates perfect positive correlation. The correlation between FXI and YUM over the past quarter is +0.2, very low. It’s 0.0 for the past year. Over the past 2 years, the correlation is also 0.0. If you go back further, it actually turns negative. The 3-year is a -0.2 and 5-year is -0.5. So that tells me that one asset literally has nothing to do with the other.
In conclusion, if you want to buy or sell $YUM, it probably shouldn’t be because you like or dislike Chinese stocks. Trade what you see, not what you think. And don’t be afraid to run a regression analysis to see if something actually does move with what they tell you it moves with.
They won’t run the numbers; but it doesn’t mean you shouldn’t.
My two cents…
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