We recently made a list of UBS’ Best Stocks In The AI, Growth & Low Rates Era: Top 29 US Stocks. In this piece, we will take a look at where Yum! Brands, Inc. (NYSE:YUM) ranks on the list of the top UBS AI and growth era.
The stock market at the tail end of 2024 is an evolution of the patterns we’ve observed since the start of the coronavirus pandemic. Back then, technology stocks soared as the demand for tech products rose due to lockdowns and stay-at-home restrictions. Then, as inflation soared and central banks ratcheted up interest rates to tamp it down, the markets tumbled as investors flooded into safe-haven assets and money market securities. Worries of a recession also drove some of the market’s pessimism, with investment banks, economists, and analysts predicting that the economy could experience a sharp downturn.
Now, as we get ready to welcome 2025, technology and macroeconomic concerns are still driving the market. Since technology is far more interesting and information-heavy, starting with macro is better. On this front, September was a pivotal month for indexes as it finally saw the Federal Reserve deliver a 50 basis point interest rate cut to bring rates down from a 24-year high. Since the interest rate cut, the flagship S&P index, the broader NASDAQ, and the tech-heavy NASDAQ are up by 3.48%, 5.89%, and 5.39%, respectively. This optimism is driven by lighter financing requirements allowing businesses to pursue growth and easing worries of a tight labor market and a potential economic downturn which were at the root of poor market performance on the day the rate cut was made.
However, just because the economic clouds might have dissipated doesn’t mean they’ve dissolved. The start of October’s final week saw some turbulence across major US stock indexes. The Dow, the flagship S&P, and the broader NASDAQ shed 0.96%, 0.92%, and 1.60%, respectively as investors worried that the Federal Reserve might not keep up the pace with interest rate cuts. The drop came on the back of rising Treasury yields, which typically soar if investors re-calibrate their rate estimates upwards as bonds with lower rates are sold. The turbulence followed after four Federal Reserve officials shared their thoughts on future cuts.
Their thoughts reflected a division in policymakers regarding the pace of interest rate cuts. The four officials are Kansas City Fed President Jeffrey Schmid, Dallas Fed President Lorie Logan, San Francisco Fed President Mary Daly, and Minneapolis Fed President Neel Kashkari. Logan cautioned that while she was willing to reduce rates, two takeaways from the current financial and economic picture were on her mind.
She shared that first “the economy is strong and stable. But second, meaningful uncertainties remain in the outlook. Downside risks to the labor market have increased, balanced against diminished but still real upside risks to inflation. And many of these risks are complex to assess and measure.” The Dallas Fed President added that “any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle.”
Fed’s Schmid followed a similar tune. He commented that any rate cuts should be carefully measured to ensure that the Fed did not misinterpret the economy’s reaction. Speaking in Kansas City, the Fed President commented “Outsized policy moves can provoke outsized financial market reactions to data surprises. The data are messy and subject to large revisions as we have seen in recent months. Our policy must be linked to the flow of data, but we should avoid putting too much weight on any single data point. As policymakers we should be flexible, but being nimble can come with a price. Reacting quickly builds expectations of further quick reactions.” Daly shared in a webcast that the current environment “is a very tight interest rate for an economy that already is on the path to 2% inflation, and I don’t want to see the labor market slow further,” while Kashkari stressed the data-dependent decision making at the Fed, with the central bank wanting “to keep the labor market strong and we want to get inflation back down to our 2% target.”
Naturally, investors were worried that the path to 50 basis point cuts for the rest of 2024 might not be so clear. However, even though rates might be high, the US economy continues to be the star performer globally. As per the IMF, the global economy is expected to grow by 3.2% in 2024 and 2025. This is the latest estimate in October, and the fact that it’s unchanged over the July estimate is solely due to the US. In its October report, the IMF revised US economic growth forecasts for 2024 and 2025 to 2.6% and 2.2%, while economies in the Middle East, Africa, and Central Asia saw downward revisions. Consequently, robust American economic growth made sure that the global estimates remained unchanged.
One major reason behind the bullishness surrounding America is artificial intelligence. Data from Carta shows that it’s not only Wall Street that’s bullish on AI. For the first three quarters of 2024, hardware and software as a service (SaaS) industries raised $7.62 billion and $18.43 billion in primary round startup investment, respectively. This marked 85% and 67% annual growth, and it signifies investors’ push towards technologies that facilitate artificial intelligence.
The data comes on the heels of the third quarter earnings season which is also seeing a paradigm shift for the AI industry. So far, investors have been focused on one AI company, the Santa Clara, California-based AI GPU designer whose shares are up 193% year to date. Yet, now, Wall Street is also interested in Phase 2 AI companies. These companies, according to investment bank Goldman Sachs, are those that provide AI infrastructure such as servers, semiconductor companies apart from the GPU designer, and utilities that will power up the gigawatt AI data centers that Silicon Valley has in mind for its AI models. For a detailed view of the latest in the AI industry, you can read Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks.
All these factors, from the economy to AI are also on the mind of investment bank UBS. In its latest Equity Compass note, the bank remained bullish on US stocks due to its perception of the current stock market and economic climate. “From a single stock perspective, we think many of the large U.S. tech companies offer appealing long-term upside, especially those that have leading positions in the AI value chain,” shared UBS. Shifting the focus to macroeconomics, it outlined “the combination of slowing but durable economic growth, healthy earnings growth, and continued Fed rate cuts are all supportive,” adding that while “economic growth is cooling, the labor market remains healthy. Initial claims for unemployment insurance are fairly low, there are more open jobs than unemployed people, and real wages are rising.”
The bank also identified AI as a ‘most attractive’ thematic investing opportunity. It shares that “The shift in computing infrastructure, from central processing units to accelerated computing units (GPUs), and in applications, from retrieval-based to generative-based architectures, has far-reaching implications for AI in terms of its generalizability (the ability to make predictions based on past observations) and effectiveness.” As for the potential catalysts, UBS adds that “The next catalysts we see include potential export controls imposed by the US on China in October and 3Q24 results, where we expect further positive revisions to AI infrastructure capex and more data points on AI adoption across industries.”
Our Methodology
To make our list of the top US stocks in the AI and growth environment, we first ranked the stock sectors in UBS’ Equity Compass report by the bank’s Neutral, Attractive, and Most Attractive rankings. Then, the stocks within these categories were ranked by the number of hedge funds that had bought the shares in Q2 2024. The list starts from Neutral and ends at Most Attractive, and the sectors themselves were ranked by the total number of hedge fund investors in the component stocks.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A portfolio manager holding a laptop and looking over a stock market ticker.
Yum! Brands, Inc. (NYSE:YUM)
Number of Hedge Fund Investors In Q2 2024: 36
UBS’ Sector Rating: Attractive
Sector: Consumer Discretionary
Yum! Brands, Inc. (NYSE:YUM) is one of the biggest restaurant chains in the world. It has a global presence and operates through well-known brands such as KFC, Pizza Hut, and Taco Bell. The firm’s brand image provides it with a key advantage of customer loyalty and recognition which enables it to deliver volume and command global recognition. This has enabled Yum! Brands, Inc. (NYSE:YUM) to amass sizeable financial resources as evidenced by its $6.4 billion in total assets and $7 billion in trailing twelve-month revenue. Since it’s a restaurant chain, Yum! Brands, Inc. (NYSE:YUM) thrives in a robust economy, and when it is able to balance out prices with volume for the perfect target. Additionally, two other key factors that drive the firm’s hypothesis are its ability to keep margins steady through cost control and a globally driven franchise revenue. In today’s environment of slowing global growth (as we alluded to in our introduction) and a strong US dollar, the pressure on Yum! Brands, Inc.’s (NYSE:YUM) flagship US Taco Bell restaurant chain has grown.
Yum! Brands, Inc.’s (NYSE:YUM) management commented on Taco Bell’s performance during the Q2 2024 earnings call:
“Moving on to the Taco Bell division, which represents 37% of our divisional operating profit. US same-store sales grew 5%, outpacing the US QSR industry by a wide margin. Taco Bell executed its winning formula this quarter through introducing a variety of compelling innovations such as the Cheez-It and Secret Aardvark fries. The second quarter also reflected sales contribution from the Cantina Chicken menu, our foray into an elevated chicken offering and a new platform to innovate around.
Since the platform launch, Taco Bell’s chicken sales mix has increased 10 points with nearly one in four orders, including a Chicken Cantina item. Another part of the team’s winning formula is digital in, which digital sales continue to grow at a breakneck pace. In Q2, Taco Bell’s loyalty sales were up over 30%. At Taco Bell International, the team is working on building brand relevance. It is still early days in many markets and trends remain volatile, but we remain confident in the long-term opportunity. A restored emphasis on value has forced our teams to be creative with a more limited national marketing budget. In more mature markets within Europe, which accounts for over 40% of Taco Bell International system sales, we saw encouraging signs of improvement with the introduction of value offers.”
Overall, YUM ranks 7th on our list of UBS’ top stocks in the AI and growth era. While we acknowledge the potential of YUM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than YUM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
