Take Profits in Yum! Brands Ahead of Earnings

Investors may want to take Yum! Brands' 18% year-to-date profits now rather than risk a dip, which looks likely even on an earnings beat.
By Richard Saintvilus ,

Are shares of Yum! Brands (YUM) - Get Report still on the value menu? That's the question to consider, given that Yum! stock is up 18% year to date, including 4.5% gains over the past month.

But it would be a mistake to hold these shares ahead of the Wednesday's earnings report, which is due out after the closing bell. Taking profits is the smart play here, especially with the stock rising 3.8% in the past five days. The stock is now withing striking distance of a new 52-week high.

From a technical perspective, there's not much upside to consider.

Take a look at the chart below, courtesy of TradingView.

Yum! stock closed Tuesday at $85.77, down 0.24%. The stock has bested the 5.29% year-to-date rise in the S&P 500 (SPX) index, which has gained 4.39% over the past three months.

From the chart, you can see the strong uptrend in Yum! stock, which has soared some 32% from its February low of around $65. The stock has also made a strong 9% move from its June 27 dip to around $79, catapulting the shares above all three key moving averages.

Fundamentally, these shares aren't cheap, with a forward price-to-earnings ratio of 23. That's almost 7 points higher than the forward P/E of 16.5 for the average stock in the S&P 500.

But where's the next leg of growth going to come from, given that the stock is now at its resistance level of $86.44? These recent gains are likely in anticipation of a solid earnings report Wednesday, suggesting that a beat is priced in.

From a technical perspective, with the stock firmly above its 20-day, 50-day and 100-day averages, the stock has a greater chance of testing support level of $82.50 on a "sell the news" type of event than going higher. And even if the stock doesn't fall, there's also the risk of getting trapped between support and resistance and allowing better growth opportunities to go by.

It might make more sense to take the 18% year-to-date profits now rather than risk a fall, which looks likely even on an earnings beat.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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