McDonald's Is a Junk Bond

 | Aug 08, 2014 | 11:26 AM EDT
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It's not junk food, it's a junk bond! That's what I thought of today when I saw that McDonald's (MCD) isn't down much at all despite, once again, reporting hideous numbers with some really big disappointments in Asia.

If McDonald's didn't have a yield, this stock would have been crushed. But the fact is the stock yields 3.5% at a time when the 10-year Treasury competition is selling for 2.3%. That means this junk food company is better than any junk bond that's priced off of Treasuries, especially after you factor in the tax break you get on common stock dividends.

Now, none of this would matter if McDonald's had a bad balance sheet. But it has a pristine one and there is always the hope of some financial engineering home run or an actual turn in the business. You are being paid to wait.

In the meantime, though, let's not mince words. The action isn't in fast food. It is in the natural and organic aisle. The best-performing restaurant chain for same-store sales is Chipotle (CMG), which is doing 17% comps. Even as McDonald's once owned Chipotle, the latter has pretty much declared what I would regard as a cold war against its aging, erstwhile parent. Its whole subtle campaign against the food chain could be just an indoctrination against everything McDonald's sells and it is working. The U.S. has been weak for some time, but now it is overseas that's hurting, not the least of which is because of the tainted beef story emanating from China.

The umbrella of fresh, but not necessarily organic and natural, has been extended to three fast-growing Hispanic restaurant chains I follow, the recently-public El Pollo Loco (LOCO), the Pollo Tropical division of the Fiesta Group (FRGI) and the Qdoba chain within Jack in the Box (JACK). All three of these chains are putting up comparable-store numbers in the 7% range which, which while 10 points below the phenomenal Chipotle numbers, are still incredibly impressive.

Oh, and speaking of growth, the best-performing major stock yesterday? WhiteWave (WWAV), which makes plant-based food, mostly soy and almond milk, as well as natural and organic offerings with the Horizon label and Earthbound Farm label. That company's got a level of growth of which most enterprises can only dream.

You need to think of this world, right now, as divided among two kinds of investors: those who are on a mad search for safe yield -- those have become patrons of the golden arches -- and those who want domestic growth, which can be found in the fresh food category with super growth being reserved for the natural and organic specialty companies. Both these themes are going to work, they just work for two different kinds of buyers: those who grew up eating at McDonald's and now want junk bonds and those who wouldn't be caught dead there an don't want anything that's endorsed by the Industrial Food Information Bureau, the fictitious organization designed to cover up the flaws of the food chain that Chipotle has exposed, defrocked and from which it is now profiting. 

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