I love McDonalds. Fresh fries from Mickie D’s are tough to top and you will hear no complaints from me or my wife if the kids say they want to eat here. I’m not here to make myself crave the salty goodness by talking about the food though. I want to talk about an opportunity I see with this stock.
McDonalds (MCD) has been a beast this year and is up around 30%. Quite impressive. My style is not typically to swim against the current but I will take counter-trend opportunities if they present themselves and present what I believe is a favorable risk / reward opportunity. I think MCD may be setting up for such an opportunity.
First (and much less important in my opinion) are the fundamentals. It’s hard to argue these aren’t stretched right now. Let’s looks at the PE ratio first. Currently this is right around 26 (all fundamental data from ycharts.com). Seems a little pricey for an established fast food joint. This is no up-and-comer like CMG was and SHAK is. This has been a publicly traded company since 1965. More importantly, the average PE ratio over the last 5 years has been 20.67 so we are at about a 25% premium. Then there’s the price-sales ratio. In my opinion, this is a much more important fundamental metric as sales cannot be manipulated as easy as earnings per share. This is at 5.44 which is a 40% premium to its 3.88 average over the last 5 years. In summary, investors have an aweful lot of optimism regarding MCD’s future.
Now for what dictates every investment decision I make….the chart. Below is the weekly look. As I mentioned above, there is no argument we are in an uptrend here but I do see some warning signs. Notice the momentum divergences in both RSI (price momentum only) and MFI (price and volume) as price made new highs. Next, at the bottom, see how the MACD looks like it’s starting to curl into a sell signal. These should be considered warning signs and mean nothing without price confirmation.
Here’s my game plan here. I already have a very small position in October 150 puts. If it turns up and goes back to making highs I’ll get out of these and take my loss. For the bigger trade, I’m looking to buy puts, with a strike from 150-155 and a few months out, if price dips below that 155ish consolidation range from this summer. I wouldn’t say the odds are great of this happening due to the strong uptrend it’s in, but I’ll be ready. As always, I’ll also be ready to get out and re-evaluate if price starts moving against me.