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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

My Favorite Stock McDonalds Just Got Kicked Off My “Buy” List

Companies / Corporate News Nov 19, 2014 - 06:28 PM GMT

By: Money_Morning

Companies

Keith Fitz-Gerald writes: This has been one of my favorite stocks for over 10 years.

I’ve called it a rock-solid investment, a powerful income play, and a global challenger that would be able to outmaneuver the competition to react to changing consumer preferences around the world. I’ve recommended it as a “BUY” twice to my Money Map Report readers, who had the chance to see great returns of at least 42.90%.


Just last year, I named it as one of just a handful of companies that could survive a U.S. sovereign debt crisis.

Even amid a 3.7% decline in August same-store sales, I remained bullish.

But even I can’t get past what just happened.

Here’s why one of America’s most iconic stocks just got kicked off my “BUY” list…

McDonald’s Corp. (NYSE:MCD) has survived and thrived amid plenty of challenges before. It’s been challenged by sagging sales, overseas problems and lackluster company leadership plenty of times since being founded in 1940, outlasting wars, recessions, and now the Financial Crisis.

But the news I’ve seen in recent weeks feels different – and in fact, the setbacks I’ve seen are enough to trigger what I call the “Ultimate Trailing Stop.”

That was one of the first tactics we explored here.

It’s the ongoing mental check every investor should perform with every stock they hold to see if the value they originally paid for – what made it a worthwhile investment – is still there.

Unfortunately for McDonald’s today, the answer is “no” – at least for me, anyway. That’s because for all the problems the stock has around the world, the root of its problems is here at home.

Why a More Expensive Menu Troubles Me

If you enjoy an occasional stop at the Golden Arches as much as I do, you’ve probably noticed that almost everything from Big Macs to soft drinks has gotten incrementally more expensive.

The famous “dollar menu” has been ravaged in the last 18 months, as more and more items inch up past the $1.00 price mark.

Overall the prices at McDonald’s increased by more than 3% from June 2013 to July 2014, an increase that’s well above the 2.5% rise in prices Americans paid for food outside their homes in that time frame, according to the Bureau of Labor Statistics.

So much for a “value” meal.

My guess is that there’s something else at work, too…

I suspect that McDonald’s has also been raising its prices to compensate for falling sales.

For a company whose biggest threat is posed by competition from other fast-food giants, that’s a terribly wrong-headed strategy. McDonald’s niche customer base – the middle class – has already been hammered by a shaky economy. There may be a lot of residual consumer loyalty in the U.S. when it comes to the McDonald’s brand – but many millions of customers are more than happy to visit Wendy’s or Burger King instead if they perceive a better deal. I’m sure IHOP, Chili’s, Red Robin, Five Guys, and dozens of other hamburger joints would love to capture more wallet share.

Even if only a small-seeming amount of customers are turned off by the price hikes, the corresponding dent in sales will have a ripple effect on company profits as higher prices lead to fewer customer sales and lesser profits.

With 40% of McDonald’s global customer base coming from the pinched U.S. middle class, I think that’s the inevitable outcome – and it’s not at all clear that the company’s newly appointed president for the U.S. operations, Mike Andres, understands this.

Even so, the sagging sales in the U.S. aren’t exactly a recent phenomenon – and they were partly excused by the company’s aggressive overseas expansion. In particular, I’ve been impressed by the growth McDonald’s has been laying the groundwork for in China, which is poised to see an 800% increase in the ranks of its middle class between 2010 and 2020.

Unfortunately, the news is also worrisome on this front.

Russia and China Could Pull the Stock Even Lower

In the summer of 2014, the tainted meat scandal in China looked like a body blow for the Q2/2014 earnings report, but little beyond that.

It certainly was painful for investors looking at Q2/2014 earnings, as executives reported that sales in China fell 22.7% in the last quarter. But even more ominously, these same executives admitted that they believe it will take six to nine months for business to regain the ground it lost in the Chinese, Japanese, and Hong Kong markets.

Meanwhile, health agencies in Russia are investigating more than 200 of the 440 McDonald’s stores there – and they’ve already shut down nine of them since this summer.

Ostensibly, the reason for this is a potential violation of Russian health and safety regulations. But Putin has been known to target American companies as retaliation for sanctions levied against his government. That’s why it’s probably not a coincidence that the Kremlin is punishing a famous American company at the same time the Russian economy is feeling the sanctions imposed by the U.S. and Europe following its actions in the Ukraine.

Whatever the reason – health and safety concerns, or political spite – Russia’s actions against McDonald’s are just another reason not to be optimistic about the short-term outlook for the stock.

And that brings me to an important point. Perhaps even THE point.

Dump MCD (and Others Like It) in Favor of the Six “Unstoppable Trends”

There’s no doubt food is a “must-have” commodity. Everyone has to eat and always will.

What’s more, food prices have been soaring lately, along with population, as available farmland dwindles around the world.

So you’d think MCD would seem to fit perfectly within our six “Unstoppable Global Trends,” as a part of both Demographics and Scarcity/Allocation.

In reality, though, fast food is a consumer discretionary expenditure – and that means that external forces could easily derail revenue and profits at the same time.

If you really want to tap into food as part of our unstoppable chain, you’ve got to go plow more fertile ground.

My suggestion is that you consider companies like CNH Industrial NV (NYSE:CNHI). That company is a global leader in the manufacture of agricultural and construction equipment, like tractors and combine harvesters. It remains absolutely vital to the boom in agricultural investment around the world, for self-evident reasons.

Speaking of which, I first recommended the company to Money Map Report subscribers in 2010. Since then, they’ve had the opportunity to capture gains of at least 100% and log a “free trade” to boot – a concept we talked about last week.

If you’re just learning about CNHI, don’t worry about missing the trade. You’ve got plenty of time to harness the world’s hunger. I think it’s going to be a terrific opportunity for years to come.

Remember, geopolitical flare-ups and tensions can’t derail our Unstoppable Trends, even if they can undercut once powerful companies like McDonald’s in the shorter term.

Best regards for great investing,

Keith

Source : http://totalwealthresearch.com/2014/11/favorite-stock-just-got-kicked-buy-list/#deeplink

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