McDonald's (MCD) has struggled like many corporations with less than positive global economic conditions. With the drop in value the stock has experienced, how should a long term investor look at it, and is there any opportunity for a short-term trader looking for an income play on the stock?
Management Movement Seen as a Positive
While U.S. sales have been soft and the company attributes it to the weak macro-economic conditions as well as increased competitiveness, inside changes may paint a different story. Jeff Stratton replaced Jan Fields as head of U.S. Business starting December 1st. Wall Street likes this. Investors should also. Instead of blaming outside conditions, the company is silently taking responsibility for soft sales and trying to recoup business. The weak sales have resulted in at least one analyst, UBS (UBS), cutting its outlook to neutral due to weak October sales. A $96 price target was issued.
Is McDonald's an Opportunity Right Now?
I would like to remind investors of McDonald's worst quarterly growth rate in 10 years that assisted in the free fall of the value of its stock. Global sales fell about 2% for the first time in a decade.
The key question the investor should ask here is this: "Do you think McDonald's will be selling more product as it moves into new global markets 10 years down the road?" With a respectable dividend of 3.4% people are going to be buying these products for years to come and the recent down turn makes the stock an attractive buy right now. It is true that the stock has been in a long-term decline since its high of 100 the first of this year. Is it ready to turn itself around? I am not sure it is about to turn around yet. I do believe that the macro-economic conditions have attributed to the slump in sales. The company is addressing internal issues with a management shake up but that does not mean the stock is ready to turn around just yet. But I do know that if one looks to invest in a 10 year treasury bond, it will not get the yield that McDonald gives. That's a plus - my only reservation would be if the company's stock has reached a turning point yet. I am not yet convinced it has. For this reason, a long-term investment at this point must take into account a continued down trend.
Short Term Income Traders
At this point, I would tend to lean to the bearish side of the stock for now. It is in a long-term bearish trend that has lasted most of the year. The recent bad news about sales created a reactionary move down, but the trend overall has been bearish so it just moved quicker but was not out of the ordinary. I would consider a bearish income strategy here.
McDonald's looks like it has been trading in a fairly wide channel from about 85 to 96. This is a good 10% swing when it moves all the way. It recently hit a lower bottom before bouncing back and looks like it may be back on its way down. Now I want to observe if this move will continue. The RSI indicator points out that the recent low gave the stock an over sold position so the rebound is expected. The recent high did not move above the '50' marker and that shows me it is still bearish. The MACD is not showing us anything new, it is following the movement of the stock. The recent high also pushed through the middle Bollinger Band as we are getting higher highs and lower lows. I am watching to see if the recent support level that was broken through will continue or will the stock break through again. This will tell me is the stock is going to continue to move down.
The Options Play
Presently trading at 86.06.
- Buy the March 2013 put with a strike of '87.50' (priced at $4.55)
- Sell the March 2013 put with a strike of '85.00' (priced at $3.00)
- Net Debit to Start: $1.55
- Maximum Profit: $0.95
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the Trade
- Recent poor sales trend ads fuel to the bearish trend.
- Macro-economic conditions will keep sales low for the near term.
- There are no bullish catalysts in the near future for the stock.