• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Discretionary

A Stealth Play on McDonald's: Market Recon

Take a bite of this options strategy on MCD.
By STEPHEN GUILFOYLE
Aug 07, 2018 | 07:23 AM EDT
Stocks quotes in this article: DF, DISCA, EMR, USCR, ALB, CWH, XEC, IFF, PZZA, DIS, MCD, BRK.A, BRK.B, AAPL, WFC, KO, BAC, AXP

Fast Food Love Affair

I caught a huge break when I was a junior in high school. I had been a newspaper-kid (The term was paperboy at the time, but there were girls among us, including my sister) for the New York Daily News since I had been 11 years old. I kind of hated that job. It wasn't so much getting up a few hours before school, and collecting payments from customers who tried to avoid me deep into the night. It was the newspaper strike of 1978 that forced my hand. You see, back in the day, newspaper kids really ran their own businesses. You had to buy the papers in bulk at a discount from a Daily News representative and then sell them to your own customers.

Well, the New York Post and the New York Times went on strike with the Daily News in 1978. I was fourteen, and a senior guy at this point. No paper. No income. The guys who ran that section of Queens for the Daily News worked the phones for days. First we tried a scab paper. That thing failed immediately. Then we had an answer. Trucks would come down from New England and drop off in giant bundles -- The Boston Herald -- in front of my parents row-house. Eureka! My customers would not be shut out.

So, I agreed to buy the Boston Herald and deliver that paper. Only one thing. Half of my customers thought I was a fire-breathing go-getter and still paid me. The other half did not want a Boston newspaper. I had already paid for them. I was fourteen, and had already experienced the results of having made a poor business decision. So then I looked for a new job. A real job. Put applications everywhere. Nothing.. Until my 16th birthday. Then, my local McDonald's (MCD) and a Barclay's Bank on the very same block both offered me a job. I said yes to both of them.

I agreed to clean the bank and its parking lot before school -- it was a drug infested (angel dust) area, so I had to kick out the junkies -- and then I would flip burgers and wipe tables after school. I grew to love working at McDonald's. The place was almost like a social club. Everyone was friends and we even had sports teams. We would play other McDonald's locations in tackle football, softball and roller hockey. What could be better than that? The nuns at my school even used to let me out early on days that my hours conflicted with last period.

I still love McDonald's. In fact, I ate dinner there with my wife on Sunday after 5 p.m. Mass. Have you tried that new Quarter Pounder? If you have not, since the firm went to fresh beef, then you have never tried the darned thing. It's awesome. Give it a shot. I'm hooked.

In Common With Warren Buffett

A couple of months back, it was reported by CNBC that Warren Buffett stops by his local McDonald's every day for breakfast on his way to work. Like clockwork. I may not go that far, but I can understand it. Berkshire Hathaway (BRK.A) , (BRK.B) reported a remarkable spike in earnings over this past weekend. The firm beat expectations for revenue on growth of 8.6% year over year. The firm's insurance business rebounded significantly.

As for investment, Berkshire has never stopped adding to its holdings in Apple (AAPL) . That stock now accounts for slightly more than 26% of Berkshire's holdings, if my math is correct. Rounding out the firms' top five holdings would be American Express (AXP) , Bank of America (BAC) , Coca-Cola (KO) , and Wells Fargo (WFC) . Where is McDonald's? Nowhere. That is the answer. In fact, if you look over Berkshire's 13F filing at the end of the first quarter, the name is not listed. Know what? I'm flat McDonald's too. This is as much for me as it is for Warren. Let's analyze.

McDonald's 

Fundamentally speaking, the name trades at 19.1x forward-looking earnings, the S&P 500 at 17.6x, so the stock is not necessarily cheap at first glance. Back in July, the firm reported second-quarter earnings that beat expectations on both the top and bottom lines. Comp sales showed strength globally, but disappointed domestically. Levered Free Cash Flow is strong. Though the firm is saddled with $31 billion in total debt, its current ratio is under control. Short interest is insignificant, so not a factor, also not an artificial source of support.

I will tell you flat out what I do not like. Second-quarter revenue showed an 11.6% year-on-year decline. In fact, while EPS continues to grow, the three-year sales rate is still a negative number. Heck, book value per share is a negative number. Are there positives? Of course. Margins remain healthy, and they pay you 2.6% just to own the darned shares. On top of that, these shares are down nearly 9% year to date. Now, we are going to have to look at a chart (or two).

My Technical Analysis:

View Chart »  View in New Window »

Well, it's plain to see that the guys writing the algorithms can also read Fibonacci levels.

View Chart »  View in New Window »

Oddly, Money Flow has been solid, while the stock has not only been stuck in low gear, it's been in reverse this summer. You can see the name hanging onto a 61.8% retracement of the early March through early June move by a thread. In fact, the spot has been pierced without actually breaking several times now.

A Pitchfork has developed that forced me, as an investor, to accept the possibility that the share price might have to move lower before I decide that the risk is in my favor as an equity investor. I don't really give a darn about Warren Buffett's money. Now, we're talking about my money -- and it's my decision. The average of 14 Wall Street analysts who have set 12-month price targets for MCD is a lofty $183.73. the lowest among them is $165.

Guess what? I don't care about them either. Good chance that few of them have skin in the game, or even ever will. Buffett is known as a value investor. Buffet is obviously well aware of the McDonald's product. Buffett has not taken a bite. At these prices, that makes sense. However, Buffett is huge. I am not. When Buffet moves through the jungle, he leaves a trail of flattened vegetation that many can and will follow. People like us can still move swiftly and silently. They don't see us coming or going.

The Trade

Recent support has been a sloppy $155, I don't trust it. The 2018 low is around $147. I don't know about you guys, but I am going to engineer a net basis in that neighborhood -- or at least get paid to try. So, let's rock... and then let's go eat some of those delicious new Quarter Pounders. Even better without the cheese, dudes.

1) Equity? Not at this last sale, sport.

2) Write a cascading series of puts (minimal lots) expiring close to the Q3 October 25 earnings release? Now, you're talking.

--Sell (write) one $150 October 150 put (last: $1.75);

--Sell (write) one $145 October 145 put (last $1.06);

--Sell (write) one $140 October 140 put (last $0.51);

--Aggregate Credit: $3.32.

Worst Case: The stock collapses. The trader is forced to buy 100 shares at each strike price in October for an average of $145. less the average premium of $1.10 for a net basis of $143.90. In other words, you get paid decent dough to expose yourself to equity risk almost three bucks below the stock's low of the year.

Stock goes up? This trader will make less money than those with an equity stake, but this trader will still make money.

Economics (All Times Eastern)

08:55 - Redbook (Weekly): Last 4.2% y/y.

10:00 - JOLTS Job Openings (June): Expecting 6.677M, Last 6.638M.

15:00 - Consumer Credit (June): Expecting $16.1B, Last $24.56B.

16:30 - API Oil Inventories (Weekly): Last +5.59M.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (DF) (0.15), (DISCA) (0.86), (EMR) (0.86), (USCR) (1.38)

After the Close: (ALB) (1.28), (CWH) (1.06), (XEC) (1.64), (IFF) (1.59), (PZZA) (0.54), (DIS) (1.95)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Guilfoyle was long DIS equity. Short DIS put options.

TAGS: Investing | Global Equity | Consumer Discretionary | Consumer Staples | Economic Data | Earnings | Economy | Newsletter | Politics | Stocks

More from Consumer Discretionary

Apple's Price Charts Are Getting Badly Bruised

Bruce Kamich
May 12, 2022 1:10 PM EDT

Here's what the odds favor.

RH and Its Charts Don't Have That Homey Feeling Right Now

Bruce Kamich
May 12, 2022 8:32 AM EDT

The technical signals of the home furnishings provider indicate more downside to come in its stock.

Crocs Is Still Slipping to the Downside on Its Charts

Bruce Kamich
May 11, 2022 7:44 AM EDT

The footwear maker isn't seeing a lot of technical support at this point.

Screening for Deep-Value Stocks Turns Up a Pair of Possibilities

Jonathan Heller
May 9, 2022 10:00 AM EDT

A producer of small appliances and a maker of fishing, camping and kayaking gear pop up as possible value plays.

Bearish Bets: 3 Slumping Stocks You Should Consider Shorting This Week

Bob Lang
May 8, 2022 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • 03:07 PM EDT PAUL PRICE

    Why Is Walmart Down Big Today?

    Besides its poor earnings report Walmart was way...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login