Buy McDonald’s (MCD) in Jubak’s Picks

Take a tour of a your neighborhood McDonald’s (MCD) and then of a Burger King and a Wendy’s. I think you’ll see that McDonald’s has separated itself from the competition. Yes, it’s still the place to go for a Big Mac, but the company now sells premium coffee, smoothies, and salads (and, yes, I’ve actually seen someone order and eat a McDonald’s salad.) A good number of the McDonald’s I’ve visited lately (research, research, research) have been re-freshed (the high-tech mix your own soda flavors machine is a blast). The company has found a mix that keeps the best of the old (I saw two teenagers order Happy Meals at lunch today) while adding the new (Iced Caramel Mocha, for example.)

I think Wendy’s is still a great basic burger experience. And, yes, the burgers at a specialized chain like Five Guys are better. But for variety of menu (I’ve never seen anyone order a hotdog at Five Guys), and price, I think McDonald’s stands alone. The new competition isn’t really fast-food burger chains but Starbucks (SBUX) and middle market restaurant chains. And in a soft global economy, I think I’d bet on McDonald’s in that competition.

What been most impressive to me about McDonald’s performance during the slow post-financial crisis economy in the United States and around the world has been the company’s ability to deliver value pricing and yet keep margins high even with commodity prices climbing. Read more

“A secular sideways market.”

That’s the best succinct description that I’ve heard so far of the stock market we’re in. It comes from Jack Ablin, chief investment officer at Harris Private Bank, at a panel that we shared at the recent Las Vegas MoneyShow.

At the same conference, Sam Stovall, the chief equity strategist for Standard & Poor’s Capital IQ Equity Research Department on another panel I had the privilege of sharing, peered into his crystal ball and offered that the gain on the S&P 500 would be about 4% in 2012. With lots of volatility—so much so that this year, Stovall told Bloomberg, that a 5% move should just be considered “noise.”

It’s reassuring to me these two smart market analysts see something like what I’ve called the “New Paranormal” market http://jubakpicks.com/tag/paranormal/ in my March 2 post. In my paradigm that market is characterized by lots of volatility but not much net gain—Ablin’s “sideways”—and achieving an annual return of 5%–Stovall’s 4% for 2012—should be considered a major achievement. This is still a paradigm under construction (and I’ll post a link for you to get a copy of its latest revision from the MoneyShow on May 16 on my http://jubakpicks.com/ site in the next few days.)

But watching the market action and listening to investor sentiment over the last few days has already suggested a new element to add to the model. It’s what I’m calling the Dangers of Deflationary Investor Sentiment. And I think it’s a major obstacle to achieving even the 4% to 5% returns that characterize a secular sideways market.

So let me start by telling you what this is, why it’s dangerous, and what to do about it. (Along with a few stock picks for execution during this current sell off.) Read more

Everybody “knows” that first quarter earnings growth for U.S. stocks will be anemic this year. The projection for year-to-year earnings growth on the Standard & Poor’s 500 stocks is just 0.93%, according to Standard & Poor’s Capital IQ. That compares to 19.68% earnings growth in the first quarter of 2011.

Logically this means stocks are headed for a correction as companies report their first quarter results beginning with Alcoa (AA).

“Logically,” that is, for most realms outside the stock market. In the logic of the stock market, however, the result is by no means so certain. What everyone knows is frequently discounted in share prices. But sometimes what everyone knows in his or her head isn’t really believed by investors. Intellectually, investors may know that projections for first quarter earnings growth are extremely low, but in their heart—and in their investment actions–they may remain much more optimistic. And, anyway, the earnings results of last quarter are history. For stock prices going forward, the important numbers are companies’ projections—guidance–for the second quarter and the rest of 2012. It’s expectations for future growth that make investors buy or sell.

So what will it be—Up? or Down?—for the market this earnings season?

And what strategy do I recommend? Read more

So far it’s been a troubling U.S. earnings season.

Troubling? When 80% of the companies in the Standard & Poor’s 500 that have reported first quarter 2011 earnings have come in above Wall Street projections. (That’s above the 72% of companies in the fourth quarter of 2010 and the 76% in the third quarter.) When many companies from all over the economy haven’t just beaten expectations but blown them out of the water? Cummins (CMI), a maker of truck engines, reported earnings 31cents a share above Wall Street estimates. That’s 22% above Wall Street projections. Apple (AAPL) beat projections by $1.03 a share, or 19%. Timken (TKR), a maker of ball bearings and other specialty steel products, beat projections by 31%.

Earnings problems?

Well, yes. If you look not just at the numbers for this quarter but at how companies achieved those numbers, then, yes, this stock market has an earnings problem. If you look at the trends in this quarters numbers on things like the cost of goods sold, then, yes, this market has an earnings problem.

Let me demonstrate with some very concrete examples. Read more

McDonald’s financial secret sauce contains yuan