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
3 buys for this sideways market–and more thoughts on the “New Paranormal”
“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
Earnings season begins today–here’s how to look for bargains (and when to decide to head for the hills)
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
McDonald’s financial secret sauce contains yuan
Want some yuan with that Big Mac?
On August 19 McDonald’s (MCD) became the first foreign non-financial company to sell yuan-denominated bonds in Hong Kong.
The U.S. company sold 200 million yuan (about $30 million) of 3% notes due in September 2013. Standard Chartered (SCBFF) was the manager on the sale.
The sale marks another step in China’s plan to create a financial system on a par with the markets in Tokyo and New York. That will eventually require China to turn the yuan into a freely exchangeable currency and China is certainly not willing to go there yet. But in February foreign companies became eligible for the first time to sell yuan-denominated bonds in Hong Kong.
It makes sense for McDonald’s to tap into the Chinese funding pool since it is now a familiar brand name in China.
Read more
Sell McDonald’s (MCD)
McDonald’s (MCD) has put together an extraordinary 2010—so far. But I’m not as excited about the second half of the year, especially not at current share prices.
On Monday August 9 McDonald’s announced that global comparable store sales climbed 7% in July from July 2009. Sales at restaurants open for 13 months or more rose 5.7% in the United States and 10% in Asia, Africa, and the Middle East.
McDonald’s sales are indeed hitting on all cylinders: the dollar menu, new higher priced menu offers, frozen frappes, and upgraded coffee drinks have all boosted sales since their roll outs.
However, it’s not sales that worry me but margins. In the first half of 2010 McDonald’s benefitted from falling commodity prices for wheat, corn syrup, sugar, beef, chicken and other raw materials. In its last conference call with analysts the company said that it expected commodity prices to continue to decline in the second half of the year but at a reduced rate.
With wheat and other grain prices soaring on drought, wild fires, and grain export bans, I don’t think declining commodity prices are guaranteed in the second half of 2010.
That wouldn’t be a problem except that the stock has become rather expensive given the 13% earnings growth projected by analysts for 2010 or the 8.2% growth rate projected for 2011.
