Schaeffer's Trading Floor Blog

Yum! Brands, Inc.'s (YUM) Taco Bell Breakfast: Good in Theory, Bad in Reality

Yum! Brands, Inc. (YUM) would have been better off letting Pizza Hut do breakfast

by 1/29/2015 10:13 AM
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Breakfast from Yum! Brands, Inc.'s (NYSE:YUM) Taco Bell sounded like a great idea when it was first announced. The fast-food chain -- creator of fun, popular items such as the Doritos Locos Taco -- seemed like one that could really shake up the breakfast landscape.

Taco Bell has a cult following, and people needed more options for early food outside of McDonald's Corporation (NYSE:MCD) and Tim Hortons Inc. (NYSE:THI). We'll exclude Starbucks Corporation (NASDAQ:SBUX) or Dunkin Brands Group Inc (NASDAQ:DNKN) from this subject, since coffee is their No. 1 focus. Fast-food breakfast seemed like an area with room for another major player. Luckily for all those too lazy to make their own breakfast in the morning (me), Taco Bell made the jump in early 2014.

But, has the Taco Bell breakfast been a success? The initial numbers said "yes," with YUM's CEO praising the company's ability to launch a successful breakfast campaign, which is apparently hard to do. But could this "success" just be from initial curiosity, a premature excitement over new food that will soon fade? My answer is "yes."

Why do I say this? What do I see holding back Taco Bell's breakfast success? Well, the biggest issue Taco Bell may face is that none of the items on its breakfast menu are very good -- at least, not at the locations I've patronized. From my experience, the breakfast burritos taste like plastic, and the Waffle Taco -- while in theory a great idea -- is nowhere close to what it's cracked up to be. I'm no restaurant expert, but I think food joints need good food to keep making money.

As I said, the idea of Taco Bell breakfast is great, but the reality isn't pretty. Over time, I think people will begin to realize the fast-food chain's morning menu isn't what they hoped for.

From where I'm standing, YUM missed an opportunity here. The company is trying to reach millennials, Taco Bell's main demographic. It's trying to appeal to college kids, and other youngsters, who for whatever reason are out late at night, or are up extra early, or maybe simply still awake at 7 a.m., and need something tasty -- and filling, to fight off that hangover. Instead of coming up with all these wild ideas for a breakfast menu at Taco Bell, YUM should have just introduced breakfast through its other popular restaurant brand: Pizza Hut.

As a recent college grad, I can tell you that the one thing I probably had for breakfast more than anything else was cold, stale pizza. Mmm, now that's real breakfast. It would have been so easy, too! Pizza Hut could have just used its leftover pizza, threw it out on a table, and tacked up a sign: "Pizza, $2 a slice." Put out some already-opened packages of ranch dressing and other random condiments left behind on tables by yesterday's patrons, and now you have the attention of millennials everywhere.

But seriously, as much as it disappoints me to say it, Taco Bell's breakfast was a flop for my taste buds. We'll hear more about the numbers next week when Yum! Brands, Inc. (NYSE:YUM) reports its fourth-quarter figures. Maybe it'll give even more positive highlights from its breakfast foray. However, I'm still short Taco Bell breakfast in the long term.

Daily chart of YUM since July 2014

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Analyst Upgrades: Facebook, Inc., Tractor Supply Company, and Salix Pharmaceuticals, Ltd.

Analysts upwardly revised their ratings on Facebook Inc (FB), Tractor Supply Company (TSCO), and Salix Pharmaceuticals, Ltd. (SLXP)

by 1/29/2015 9:46 AM
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Analysts are weighing in today on social media giant Facebook Inc (NASDAQ:FB), farm equipment retailer Tractor Supply Company (NASDAQ:TSCO), and drugmaker Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP). Here's a quick roundup of today's bullish brokerage notes on FB, TSCO, and SLXP.

  • Despite an initial negative earnings reaction, FB received a round of price-target hikes, after the company's fourth-quarter earnings report handily topped analysts' estimates -- thanks to a surge in mobile ad revenue. Weighing in on the stock was Cantor, which raised its price target by $10 to $90, and Stifel, which upped its target price to $97 from $94. Both brokerage firms underscored their "buy" ratings. Technically speaking, FB is up 0.4% this morning, and has been a standout on the charts, boasting a more than 42% year-over-year gain to trade at $76.55. Not surprisingly, options traders have been optimistic, as evidenced by Facebook Inc's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 2.60, which ranks in the 83rd annual percentile. Simply stated, calls have been bought to open over puts at a quicker-than-usual clip in recent months.

  • No fewer than five brokerage firms raised their price targets on TSCO, following the firm's fourth-quarter profit beat. Included in the bunch were Nomura and Barclays, which each upped their price targets to $92, while reiterating their respective "buy" and "overweight" ratings. Since hitting an annual low of $55.95 in mid-October, TSCO has been on fire -- rallying nearly 46% to trade at $81.54. In fact, the equity touched a record high of $84.82 out of the gate. Should the shares extend this momentum, short sellers could start hitting the exits. Short interest rose 8.7% in the latest reporting period, to 5.6 million shorted shares. What's more, it would take more than a week to cover these bearish bets, at Tractor Supply Company's average daily pace of trading.

  • SLXP received upwardly revised price targets from Jefferies (to $149) and Cantor (to $151), after the company said it will restate its financial statements for the past seven quarters. The stock has had a strong start to the year, up 16%, and this morning has added 3.7% to trade at $132.98. However, six out of 14 analysts covering the shares maintain a tepid "hold" recommendation, and the average 12-month price target of $130.69 stands at a discount to the equity's current perch. If Salix Pharmaceuticals, Ltd. continues to outperform, a fresh wave of upgrades and/or price-target hikes could help fuel its fire.

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Analyst Downgrades: Qualcomm, Cliffs Natural Resources Inc., and Silver Wheaton Corp.

Analysts downwardly revised their ratings on QUALCOMM, Inc. (QCOM), Cliffs Natural Resources Inc (CLF), and Silver Wheaton Corp. (USA) (SLW)

by 1/29/2015 9:22 AM
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Analysts are weighing in today on telecom giant QUALCOMM, Inc. (NASDAQ:QCOM), commodity concern Cliffs Natural Resources Inc (NYSE:CLF), and precious metals producer Silver Wheaton Corp. (USA) (NYSE:SLW). Here's a quick roundup of today's bearish brokerage notes on QCOM, CLF, and SLW.

  • QCOM reported an earnings beat last night, but a reduced full-year profit and sales forecast has the brokerage bunch turning bearish. Specifically, at least a dozen analysts reduced their price targets on the stock, while Macquarie downgraded it to "neutral" from "outperform." As a result, QUALCOMM, Inc. is sitting nearly 7% lower ahead of the bell. As it is, the shares have had a pretty rough go of it -- shedding 13.4% of their value since hitting a late-July 14-year high of $81.97 -- to close Wednesday at $70.99. Additional downgrades could be in the cards, too. Currently, 17 out of 23 covering analysts rate QCOM a "buy" or better. In other news, the company's health care subsidiary has entered into a strategic collaboration with Roche on a system to remotely monitor and manage patients with chronic illnesses.

  • CLF saw its price target cut by $1 to $8 at RBC, which also reiterated its "sector perform" assessment. This bearish note isn't surprising, considering the stock's 67% year-over-year deficit to trade at $6.62. Elsewhere, short sellers have taken a shine to Cliffs Natural Resources Inc. Over half of the equity's float is sold short, which would take more than week to cover, at CLF's average daily trading volume. Ahead of the bell, the stock is pointed slightly lower. Looking forward, the company will report fourth-quarter earnings Monday night.

  • Finally, Raymond James weighed in on a number of precious metals producers, including SLW, which it downgraded to "outperform" from "strong buy." This is somewhat surprising, considering the shares have rallied an impressive 12.6% year-to-date to rest at $22.90, and are sitting atop potential support at their 160-day moving average. Traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) are also skeptical. Silver Wheaton Corp.'s 10-day put/call volume ratio of 0.61 ranks in the 83rd percentile of its annual range, hinting at a stronger-than-usual appetite for bearish bets over bullish. This morning, the stock is sitting 3.1% south of the flatline.

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Buzz Stocks: Alibaba Group Holding Limited, Amazon.com, Inc., and McDonald's Corporation

Today's stocks to watch in the news include Alibaba Group Holding Ltd (BABA), Amazon.com, Inc. (AMZN), and McDonald's Corporation (MCD)

by 1/29/2015 9:12 AM
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Futures are signaling a higher start, as traders digest the latest raft of earnings reports. Meanwhile, among specific stocks in focus are e-commerce concerns Alibaba Group Holding Ltd (NYSE:BABA) and Amazon.com, Inc. (NASDAQ:AMZN), as well as fast food giant McDonald's Corporation (NYSE:MCD).

  • BABA is bracing for an 8% drop out of the gate, after the company reported lower-than-expected revenue for the fiscal third quarter. It's already been a rough week for Alibaba Group Holding Ltd, with the stock off 4.5% since last Friday's close to trade at $98.45, following a handful of fundamental developments. A continued slide could spark a round of downgrades and/or price-target cuts. Currently, all 22 analysts covering the shares maintain a "buy" or better rating, while the average 12-month price target of $120.31 stands in territory yet to be charted by the Wall Street freshman.

  • Ahead of tonight's quarterly earnings report, AMZN's cloud computing business unit unveiled a new corporate email and scheduling service, WorkMail, which will be launched in the second quarter. On the charts, the stock has been a long-term laggard, and is down 20.9% year-over-year to trade at $303.91. As such, short-term speculators have shown a preference for puts over calls, as evidenced by the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.55, which ranks in the 97th annual percentile. With earnings on the horizon, those purchasing premium on AMZN's front-month options are willing to pay a pretty penny. In fact, the security's Schaeffer's Volatility Index (SVI) of 51% rests higher than all other readings taken in the past year, meaning premium is relatively expensive at the moment.

  • MCD announced today that CEO Don Thompson will step down, and be replaced by the firm's current chief brand officer, Steve Easterbrook, effective March 1. The news follows a dismal showing by MCD both on and off the charts, with the equity tumbling 1.5% last week in the wake of an uninspiring fourth-quarter earnings report. Longer term, shares of MCD have surrendered more than 14% since topping out at a record high of $103.78 in mid-May, and closed last night at $88.78. Options traders have kept the faith, though, and at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), MCD's 50-day call/put volume ratio of 3.84 ranks just 7 percentage points from a 52-week peak. Should the shares continue to struggle, an unwinding of these bullish bets could translate into headwinds for McDonald's Corporation.

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Lessons in Probability: A Post-Mortem on Apple Inc. (AAPL)

Following the money worked -- this time -- for Apple Inc. (AAPL)

by 1/29/2015 8:37 AM
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In the middle of our semi-daily panics about Europe, someone decided to throw in an earnings season. When I think of it, I try to tweet out higher-profile earnings estimates. That is, estimates of the magnitude of the earnings move as suggested by the options volatility curve as calculated by ThinkorSwim.

On Tuesday, for example, I noted that Apple Inc. (NASDAQ:AAPL) options priced in a 6.3% move. All options across the board get bid up in volatility terms ahead of earnings in a stock like AAPL. But the bid-up is larger in options that are closer to expiration. So that estimate is based on the degree of the bid-up relative to the bid-up in further-out options. It's important to note that it's an estimate. The whole volatility board may react more or less to the number.

So what does that number tell us? In theory, it gives us the point where both volatility-long and volatility-short strategies break even. Obviously not everyone in the pool has the same experience, because real-life positions are always more nuanced. But it's a good approximation to an equilibrium move. It's almost like a pin at expiration. If the stock is near that level, there's neither extreme pressure from trapped options shorts nor options owners seeking to offset the volatility drop that's about to happen. Get away from that level and you could see a move compound upon itself.

And it's important to remember that the estimated move is akin to a standard deviation. As a whole, roughly two-thirds of names will move within their earnings estimates, and one-third will make larger moves. It's a dynamic process. If lots of names move beyond their estimates, then volatility will almost certainly rise in the next batch of names, and will keep rising until we hit some sort of equilibrium.

What does this estimate not tell us? Direction. That's a different sort of analysis. I tend to default to "the present trend continues." If a name is trending, I expect it to react consistently with that trend. I would use options volumes and open interest as a bit of a contrarian tell, but only if it tells a different story to the overall trend.

Take AAPL again, for example. The trend suggested up. If the world wanted to play earnings with puts, either to hedge gains or speculate on a miss, I would have found that a very bullish combo. But alas, that wasn't the case, the world wanted them some upside (click picture to enlarge).

Open Interest on AAPL options with 30 days or less to expire

Following the money did work this go-around, but I'd be careful using that as a regular strategy. Heavy volume can become a magnet towards a strike, as in this case, but it can also lead to a big reaction in reverse if the masses are leaning one way and the move goes against them.

All in all, there's really no simplistic and magical prediction system that tells you where the stock is about to go. If there was one, everyone would use it and it would stop working anyway. It's all about probability. The magnitude estimate tells you the market expectations. Volume and open interest analysis tells you how investors are playing it. And the stock chart itself gives you a sense of trends and support resistance levels. Throw them all together, consider the overall market backdrop, and you can make some educated guesses.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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