In just over two years, Yum! Brands stock (NYSE:YUM) nearly doubled from as low as $46.44 in February 2016 to $87.45 earlier this month, bringing the total market capitalization of the fast-food restaurant chain to over $29 billion. Does this mean now is the time to jump on the bandwagon in anticipation of even better days ahead? “Not so fast” says the Elliott Wave Principle – an analytical method based on price pattern recognition, which we applied on the daily chart of Yum stock below.
The daily chart shows Yum Brands stock’s entire rally since February 2016. As visible, its structure forms a clear five-wave impulse, labeled 1-2-3-4-5. The sub-waves of wave 3 are not hard to identify as well. According to the theory, every impulse is followed by a three-wave retracement in the opposite direction. In Yum!’s case, it means a bearish reversal should soon give the start of a significant decline to at least $70 a share. In addition, the relative strength index shows a strong bearish divergence between waves 3 and 5, uncovering the weakness the bulls managed to keep in disguise since mid-2017.
If this count is correct, investors need to fasten their seat belts, because the anticipated three-wave decline could erase about 20% of the company’s market value. Besides, even fundamental measures like the price to earnings ratio (P/E) and the price to free cash flow ratio (P/FCF), which stand at 23 and 40, respectively, suggest Yum Brands stock is overvalued.
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