Stocks for the Next China Bull Run

James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Calling bottoms in the market is a very tricky business, but that doesn't stop Wall Street from trying.  Over the last couple of weeks there has been increasing speculation that a bottom in the Chinese market may have formed.  If this is true and China is about to begin a new bull cycle, here are some safe stocks for the future.

First, a note on safety.  Since we are speculating about a bottom in the China market we should understand that there is an added element of risk.  We will minimize that risk by selecting stocks that will grow without a Chinese bull market but will also be poised to benefit once that upswing in China does materialize.

Yum! Brands (NYSE: YUM) is currently trading at $66.19, which is down almost 11% from its 52 week high of $74.75.  The very recent downturn was a result of the company guiding lower on growth in China.  However, if it is true that China may have hit bottom, could this be the perfect time to add YUM! to your long term portfolio?

Let's take a look at some basic stats to make sure this is a buy.

Valuations YUM! Industry
P/E 19.50 21.30
Yield 2.0% 2.9%
Payout Ratio 34.00% 39.00%
5 Year Dividend Growth Rate 16.71% 13.27%
Sales 5 Year Growth Rate 4.72% 4.00%
EPS 5 Year Growth Rate 13.91% 7.07%
Net Profit Margin 5 Year Average 9.60% 8.20%

YUM! is a stock that is outperforming in many key ways but trading at a discount.  The lower yield can be reconciled by the fact that YUM! has a lower payout ratio (leaving room for increases) and a history of out-pacing the distributions in the industry.  Overall YUM! looks to be a buy and hold for the long term, especially with the prospect of growth returning to China.  Look for an entry point in the $63/$64 range with a 52 week price target of $82 based on industry valuation and slightly optimistic earnings projections of $3.81 for next year.

Starbucks (NASDAQ: SBUX) looks to be a solid pick with or without a China bull market, which is why it provides the perfect element of safety.  Starbucks has unveiled plans recently for accelerated global growth.  But they aren't forgetting what made them successful with 1,500 stores planed for the US market alone.  They know stability will be key to maintaining a solid income stream.  This will provide a cushion when branching out to foreign markets.

Currently Starbucks is trading at $53.08 which is about 14% below its 52 week high of $62.00.  The huge downturn it saw in the middle of the year was due to many factors, but lowered guidance seemed to dominate the headlines at the time.  Now that guidance is being revisited by some analysts due to the potential for a China rebound.

The downturn that Starbucks saw recently may be a great opportunity for investors.  This solid out-performer has recently been put on sale with a P/E of 30.00 vs. an industry P/E of 42.90.  Fundamentals are great and this company has some of the best management in the game.  I would look for an entry price of $51/$52 with a 52 week price target of $76 based on conservative valuation and forward earnings projections of $2.62/share.


Lulupoopsalot has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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