McDonald's (MCD) has been having a tough year. Due to some global woes regarding weak sales in the face of a potential slow down, particularly in Europe, investors figured that the mighty growth potential of this giant has come to a halt. The graph below tells us the whole story.
After brushing the $102 price level on January 2012, investors quickly fell out of love with the giant burger chain. Shares of the company have lost 15% since the beginning of 2012 and are now sitting at their 52 week lows.
Value or value trap?
Our first goals is to determine whether McDonald's has turned into an unloved, value company or a dangerous value trap. In order to do just that, we will compare the company's numbers with that of a few leading peers in the fast food restaurant business, such as The Wendy's Company (WEN), Yum! Brands (YUM) and Burger King Worldwide (BKW).
|Forward P/E||Quarterly Revenue growth||Operating Margin||Div. Yield|
How to take advantage of this opportunity
McDonald's is a great company with a fantastic distribution channel and it is finally selling on the cheap. I believe now is the right time to be long McDonald's. You can do that in one of 2 ways:
- Buy shares of the company.
- Sell the January 2014 Put options, at the $87.5 strike, on the stock. These put options will obligate you to buy shares of the company IF they trade for less than $87.5 come January 2014. As a reward for our trouble, we will receive an immediate payment of $9.1 for each Put option we sell. This equals 10.4% in a ($9.1 divided by $87.5).
How this trade can play out
There could be 3 possible scenarios for the stock, come January 2014 expiration date:
- MCD price > $87.5: you get to pocket the premium and walk away, free of obligations.
- MCD price = $87.5: you get to pocket the premium and walk away, free of obligations.
- MCD price < $87.5: you get to pocket the premium but you are also obligated to buy in, i.e to purchase a certain amount of shares at the predetermined price ($87.5). Once we have decided that $87.5 is a fair price to pay for those shares, I see no great risk in a scenario in which we are actually committed to step up and purchase those shares. Also bear in mind that we have been paid 10% simply for making this obligation (selling the put contract), regardless of what happens to the price. In my opinion, this is a classic situation of "heads I win, tail you lose".
Sell to open the January 2014 Put options, at the $87.5 strike, on MCD. Do not accept less than $8.5 for each option.