One of the best pieces of investment advice I ever read was in Peter Lynch’s must-read book, One Up on Wall Street. He said to buy stocks in companies that you know. This does not mean to just buy up stock in every company that produces a product you use, but to think about how and why a certain company might have success for the long term. For me and my stock advisory newsletter, The Liberty Portfolio, I ask if a given product “is fundamental to the human experience, something that has become so intertwined in our DNA that we could not do without it.” Those are the stocks to consider, and Yum! Brands, Inc.(NYSE:YUM) fits the bill.
So why is this triumvirate of food brands so darn important? Here’s my thought process about a product being “fundamental to the human experience.”
Everyone needs food. That’s why they call it “food.” You can’t live without it. You may want to, in order to lose weight, but food is a necessity. It isn’t just a staple. It’s a requirement. YUM stock will always do well because Yum Brands sells food.
There are many kinds of food, but certain kinds of food are also necessities. Yum Brands makes meals. Not only that, they are meals that one can eat and — largely because of the fat and protein content — make you feel reasonably full.
See, the difference between necessity food and snack food is that the former has some kind of foundational nutritional value. It won’t win any nutrional awards, but it is enough to get people by. In fact, some of the offerings at Taco Bell (lighter menu, salads), at KFC (grilled chicken), and even Pizza Hut (protein in the meats and cheese) are quite reasonable from an intake standpoint.
It isn’t just people in the low-to-middle income brackets who consume YUM stock foods. According to the CEO, half the U.S. population eats Taco Bell once a month, and the average person comes in every 11 days. Yet when we look at the very broad picture, as indicated by a recent study, fast food serves every demographic. Of the richest 10% of Americans, 75% report eating fast food at least once every 21 days. Those numbers increase as one moves down the income scale. Of the poorest 10%, 81% report eating once every three weeks, and 85% of the middle percentiles do as well.
I should also point out that the speed with which the food is delivered and consumed is also a major part of YUM stock and the performance of YUM stock price over the years.
Time is money. That’s true for everyone, and for parents, even more so. What we’ve learned from decades of fast food service, and what the film The Founder dramatizes, is that food that is of at least a certain level of quality, delivered at a reasonable price, and delivered quickly, holds tremendous value for people all over the world.
Finally, consider this: Fast food and YUM stock continues to do well despite the obsessive focus on healthy eating that has consumed the nation for the past 20 years.
As for YUM stock itself, you can’t go wrong buying and holding it for the very long term. I am price conscious, though, and buying YUM stock at 18x on 6% growth gives me heartburn. Personally, I would wait for a broad market correction.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.