(Please keep in mind that the author of this fundamental study is also a financial writer and portfolio manager.)
McDonald’s stock has already dropped 8% from its January highs, and some options traders predict another 7% loss. On October 23, the business will publish third-quarter profits, which are expected to be healthy despite dropping sales.
Technical analysis also shows that the stock may decrease after quarterly earnings.
MCD data by YCharts
Bearish Option Bets
The options expiring on December 21 at the $160 strike price substantially favor the stock dropping, with puts outnumbering calls by a 9-to-1 ratio. There are 5,000 active contracts for the $155 strike price puts. To make a profit on those options, the price would have below fall to $152.50.
The data illustrates that the stock has been declining from its top in January. It tried but failed to break out in early October. At $165, it is now less than technical support. The next level of technical support is not available until the price reaches $155.50, which is 5% less than the current stock price of $164. (See: McDonald’s Stock Could Collapse in the Coming Weeks.)
Despite the stock’s rise to new highs, the relative strength index has been heading downward since May of 2017, indicating a bearish divergence. It implies that momentum is still leaving the stock.
Analysts expect McDonald’s profits to increase 13% to $2.00 per share in the third quarter. However, sales is expected to decline by 8% to $5.3 billion.
MCD Annual EPS Estimates data by YCharts
The long-term narrative is more of a struggle. Earnings growth in 2019 is predicted to slow to 7%, half of what it was this year. Analysts predict that sales will decrease next year, after an 8% drop this fiscal year.
The stock is not cheap, with a 2019 PE ratio of 20. An investor is paying roughly three times the estimated growth rate for the firm in 2019. The company has traded with a one-year forward PE ratio ranging from 15 to 25 since 2015. Given McDonald’s high premium and poor fundamentals, a stock fall is more probable than a prolonged increase.
Michael Kramer is the Founder and Manager of Mott Capital Management LLC, a registered investment advisor, and the manager of the firm’s actively managed, long-only Thematic Growth Portfolio. Kramer normally purchases and keeps equities for three to five years. Click here to see Kramer’s profile and portfolio holdings. The information offered is only for educational purposes and does not constitute an offer or solicitation to sell or buy any particular stocks, assets, or financial strategies. Unless otherwise specified, investments involve risk and are not guaranteed. Before adopting any of the strategies outlined here, contact with a knowledgeable financial advisor and/or tax expert. The adviser will offer a list of all suggestions made in the previous twelve months upon request. Past performance does not predict future performance.
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