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(Adds comment from Yum!, details; updates share price)
By Svea Herbst-Bayliss
BOSTON, May 1 (Reuters) - Billionaire investor Daniel Loeb said on Friday his hedge fund has taken a new position in Yum! Brands, sending the fast-food restaurant company's stock up nearly 7 percent.
Third Point LLC, Loeb's $17.5 billion firm, bought into Yum! during the first quarter after determining it has "turned the page on recent trouble in its Chinese business," and that profit would recover dramatically over the next one to two years.
"We think investors should want to own Yum! for its unique open-ended middle-class growth story in China and its strong and growing franchise-led cash flows outside China," Third Point said in the letter to investors, which was seen by Reuters.
Yum!'s stock closed at $91.90, up 6.91 percent.
A Yum! spokeswoman said: "We appreciate their confidence and investment in Yum Brands."
Third Point did not disclose how much it invested in Yum!
It gave Yum! management strong marks for having tackled two food-safety problems in China over the past three years and said it was focused on narrowing the performance gap between its KFC and Pizza Hut brands and competitors.
In China, Yum! operates 7,000 KFC and Pizza Hut restaurants in more than 1,000 cities and has three times as many restaurants as its closest competitor, McDonald's, the letter said.
Loeb isn't alone in his newfound taste for the fast-food chain restaurant. Hedge fund manager Keith Meister, who runs Corvex Management, also took a stake earlier this year, a source familiar with his fund said.
In addition to Yum!, Third Point took a new stake in Devon Energy, saying it could perform better as management begins to focus its "capital in fewer, higher return areas".
The fund urged management to continue streamlining its portfolio and focus on top-tier U.S. assets in the Permian Basin, Eagleford, and Cana-Woodford.
Devon's share price rose 0.59 percent to $68.61.
Third Point is one of the hedge fund industry's most closely followed investors, in part because of its strong performance. Loeb has returned an average 20.5 percent for clients every year since 1995, more than double the Standard & Poor's 500 index.
During the first quarter, Third Point gained 3.4 percent as bets on Actavis, FANUC Corp and Dow Chemical paid off even as bets on Alibaba, Ally Financial and Kroton Educacional SA pinched.
Overall, Third Point said there were still good bets to be made in U.S. stocks despite worries about an impending rate hike and the dollar's strength. (Reporting by Svea Herbst-Bayliss; editing by Richard Valdmanis and Peter Galloway)