Put McDonald's Back on Your Menu

Earlier this week, I was doing my homework for the "Fast Money Halftime Report" and was asked if I had an opinion on the restaurant stocks following the strong earnings from El Pollo Loco (LOCO) .

Earlier that day, Yum! Brands (YUM) announced that the latest chicken supply issues in China had taken a toll on its same-store sales and said that it would be reporting a 13% decline in this region following this latest issue. Being that this wasn't the first chicken supply scare announcement from the company, I thought for sure YUM's stock would get crushed as investors are totally losing confidence in the China growth story at the company. It fell 4% before hours but, surprisingly, by the end of the day it actually finished higher. And shares gradually drifted higher for the remainder of the week.

Some of it is the fact that consumer discretionary stocks have turned out to be the leaders of the market in the past few weeks. Lower oil prices (down 12% from highs) and other commodity costs, a less-than-feared consumer retail reporting season, strong auto sales (a 17.5 million North American SAAR was way higher than people thought) and an improving U.S. economy (although we all would have liked to see a better jobs report on Friday). 

But one thing I've learned over the years is to pay attention to how a stock trades on good and bad news. If it doesn't go down on bad news, that's an important inflection point and more often than not means most, if not all, the bad news is priced into the shares. The same goes for when there is good news and the stock doesn't rally. A -13% comp is pretty bad news following much of 2012/2013 where YUM's comps in China fell consistently at a double-digit rate. So the action in YUM's shares were pretty telling to me.

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