Following yesterday’s investor meeting, shares of McDonald’s Corporation (MCD) rallied to new-all time highs at $114.99 before reversing and closing slightly lower on the day at $113.22. This sort of technical price action, known as a doji in candlestick charting, many times signals that the previous trend may be weakening.
Click to Enlarge With McDonald’s stock having risen more than 30% off its August lows, certainly a pullback — or at least a tempering of the rally — may be in the offing.
During the investor meeting, McDonald’s stated it would increase the dividend from 85 cents to 89 cents (3.1% dividend yield) and open 4,000 new franchises, up from the prior goal of 3,500.
More importantly, MCD declined to spin off their real estate holdings into a REIT, disappointing large investors, including Glenview Capital Management, which had been a proponent of the spinoff.
McDonald’s most recent earnings report on Oct. 22 was mostly positive, with an earnings beat of $1.40 per share compared to consensus of $1.27. Revenues also topped estimates of $6.41 billion, coming in at $6.62 billion, although still lower than last year’s $6.99 billion sales figure.
While the earnings and momentum have both been definitely positive over the past several weeks, the real question for investors and traders now is whether McDonald’s can continue to provide the growth needed to drive MCD stock higher, given a current P/E that has expanded to nearly 22.
I am also less positive than most on the prospects of the recent all-day breakfast initiative being an overwhelming plus. Important also to remember that the strong dollar will definitely bite into international revenues, which make up a large part of McDonald’s overall sales.
So given the technical price reversal MCD stock had at all-time highs, along with a fairly rich valuation and lingering growth concerns, I am looking for MCD to level off. So positioning with a put calendar spread to take advantage of this anticipated sideways action over the next few weeks makes intuitive sense to me.
I am buying next week’s MCD Nov $113 puts and selling this week’s MCD Nov $113 puts for a 62-cent net debit. My max risk on the trade is $62, so a fairly cheap entry.
If MCD closes above $113 this Friday, the short puts expire worthless and I will be left long next week’s Nov $113 puts to either re-hedge or sell.
If MCD is below $113 near the close this Friday, I would look to roll the short puts to next week’s Nov $112 puts to establish a long put spread.
As of this writing, Tim Biggam had bought MCD Nov 13 $113 puts and sold MCD Nov 20 $113 puts. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can e-mail Tim at tbiggam@deltaderivatives.com.
