Peter Lynch's old adage advises investors to "invest in what you know." If you are a fast food lover or you admire strong advertising campaigns, Lynch might suggest you pick up shares of two very different stocks in the same sector -- McDonald's (MCD) and Jack in the Box (JACK). Consider how you would have fared had you made $10,000 investments in each company one year ago.
- One year ago, $10,000 would have bought you 153.61 shares of MCD when the stock traded at $65.10. After reinvesting dividends, you would have ended up with 158.54 shares and $12,014 for a return of 20.14%, as of Wednesday's close. The same investment in the S&P 500 (SPY) would have returned 17.45%.
- During the same time frame, a $10,000 investment in JACK would have turned into just $10,118. JACK does not pay a dividend and both MCD and SPY clearly outperformed it over the last year.
From a know and love standpoint, wanting to become a shareholder in McDonald's or Jack in the Box goes beyond the food. McDonald's rings nostalgic for many, while Jack in the Box rings culturally relevant for many people, on a regional basis, today.
How could you forget the old McDonald's jingles, Larry Bird versus Michael Jordan, the introduction of supersizing, the present day I'm Lovin' It campaign, and, of course, Ronald McDonald? As for Jack in the Box, it has arguably one of the funniest and imaginative advertising runs in the history of commercials. The spots keep getting better and better.
Clearly, most people consider MCD first in relation to their investments. JACK may never even get a first look. This article takes a look at both companies and makes the case for including each in your portfolio.
You would be smart to own shares of MCD for the dividend alone. MCD has paid a dividend since going public in 1976. It has increased the dividend annually to its present level of $2.44 a share, good for a 3.2 percent yield. A rather safe strategy to generate even more income from MCD stock would be to write covered calls against your shares. For instance, as of Wednesday's close, MCD July $80 calls traded for a premium of $0.91. For every 100 shares you own, you could sell one of these calls, pocket $91, and only risk having your shares called away if MCD reaches $80.91 on or before the July options expiration date. The shares closed at $75.78 on Wednesday.
MCD takes up more than the income placeholder in a portfolio. It's also a growth play. According to its most recent annual report, McDonald's franchises and operates nearly 33,000 restaurants in 117 countries. In 2010, the company generated a considerable amount of its sales in markets outside of America. Europe accounted for 40 percent sales, while Asia/Pacific, Middle East, and Africa (APMEA) produced 21% percent of total revenues, giving MCD shareholders significant international exposure.
McDonald's' February sales figures topped estimates, with U.S. numbers lagging and the APMEA region delivering the most impressive results. McDonald's plans to expand aggressively in 2011. According to its filing, the company will spend $2.5 billion in 2011, about half of which will go towards opening new restaurants. In China, for instance, McDonald's hopes to increase its locations by 15% on the way to its goal of having 2,000 restaurants in the country by 2013.
Jack in the Box
Relative to McDonald's, Jack in the Box is tiny. According to the company's FY2011 first quarter earnings report, the company counts 2,213 Jack in the Box restaurants, including 1,340 franchised locations, and 542 Qdoba locations-- a Mexican-style eatery-- of which 348 are franchised. Potentially moving towards more of a McDonald's model, JACK has been aggressively selling its wholly-owned locations to franchisees.
While it beat earnings in its most recent quarter, growth remains stagnant relative to the opportunity; Jack in the Box simply does not exist in most parts of the country. During its first quarter, the company opened 8 new Jack in the Box locations and 20 Qdoba restaurants, based on data from its first quarter report. Qdoba drives the bottom line, while playing second fiddle to McDonald's' offspring, Chipotle Mexican Grill (CMG).
JACK's ability to achieve broader penetration in a wider range of markets and bolster same store sales growth remains a major question mark. According to Yahoo! Finance, a JACK director purchased 5,000 shares of the company's stock, spending $110,600 of his own money. Decent size insider buying is often a reason to inspire confidence. For the company's FY2011 second quarter, however, guidance is relatively weak. JACK predicts same store sales to come in flat or down 2 percent for Jack in the Box stores, compared to an 8.6 percent decrease in the same quarter a year ago. The company anticipates a modest to moderate rise in same store sales for Qdoba restaurants.
Given less-than-aggressive growth plans and meager same stores sales projections, investors might want to sit through a few more commercials before jumping into Jack in the Box shares for the long haul. As for McDonald's, the ability to couple the dividends with covered call writing makes it a wise investment in just about any economic climate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.