Sozzi: How Nike, YUM Will Get Hurt

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A sucker rally, defined: 

"A temporary rise in a specific stock or the market as a whole. A sucker rally occurs with little fundamental information to back the movement in price. This rally may continue just long enough for the "suckers" to get on board, after which the market or specific stock falls."
-- Investopedia

This is the first thing I thought of when watching the Dow rip at the open on Monday. The word on Twitter was that the Crimea vote was widely expected, and that the U.S.' initial sanctions on Russia wouldn't be that intense.

So the market focused on improved industrial production data that are off a low prior month's base and, theoretically, priced into stocks a couple months ago. Gold was bid down, industrial stocks were bought, and all was well, except homebuilders, which were dumped amid industry data that were released ahead of key earnings reports from KB Home (KBH) and Lennar (LEN).

Back to Russia. The execs I talk to are concerned about this matter, and the issue adds real uncertainty to their international expansion plans. Believe you me, over the next couple of weeks you will hear more talk about the next Cold War. It doesn't take a historian to know that this would be bad news for investors who have portfolios weighted in global companies. My opinion is that investors have gotten too complacent on geopolitical risks and are in for a punch to the face. Russia is frequently mentioned by execs as a fast-growing market that is getting more investment dollars.

Here are two examples of companies that could be hurt by the rising tensions.

  • Nike (NKE) has 99 stores in Russia, 57 of them factory stores. In 2013, revenue from Russia rose a cool 28%. By the way, Nike also designed the jerseys for the Russian ice hockey team, and it is supposed to be a major player for World Cup 2018 held in Russia.
  • Yum! Brands' (YUM)  KFC segment has 250 restaurants in Russia, and it plans to raise that total to 400 by 2015. In the past two years, KFC Russia has had the highest same-store sales growth rate for the brand globally.

Stock Spotlight: McDonald's and Alibaba

Just a helpful reminder to those who showed McDonald's (MCD) shares lovin' after a recent analyst presentation. Not only are there fundamental problems inside the restaurants, there is budding cultural problem that could cause fundamental problems in the future. Here is a tidbit to chew on from the company's recent annual report:

"McDonald's does not believe that any such litigation matter currently being reviewed will have a material adverse effect on its financial condition or results of operations."

Yeah, and eating French fries every single day could help you lose 100 pounds.

On Alibaba, here is the blunt reality as I see it, before bankers pitch you this company over the phone:

You have a company that many investors in the name (outside of the banks running the deal) don't truly understand. China's consumer market could be really murky. Alibaba will have to pay exorbitant prices to acquire companies that may be worthless down the line. Those deals will get more scrutiny when Alibaba becomes a public company.

All of this at a $200 billion valuation. Not my cup of tea.

At the time of publication, Sozzi held no position in the stocks mentioned.

Brian Sozzi is the CEO and Chief Equities Strategist of Belus Capital Advisors. He is responsible for developing and managing an equities portfolio of mid- and large-cap positions, in addition to leading the firm's digital content initiatives. He is also a personal finance columnist for Men's Health magazine.

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