Like comparing a fatty and aging steak against a leaner and healthier cut, fast food stocks McDonald’s Corporation (MCD) and Sonic Corporation (SONC) allow for nice, side-by-side combo meals for bears and bulls.
In the following, let’s go through some key metrics and price charts for both MCD and SONC to uncover why bears may be biting into McDonald’s, while bulls are more likely to be ordering Sonic stock with that burger and shake.
Lastly and to keep MCD bears and SONC bulls satisfied, we’ll finish each selection with an order straight off the options menu.
Extra Fatty: McDonalds (MCD)
McDonald’s is huge. That’s not really news, as the fast food operator is global. But while there’s still room for an unlikely expansion into places like Bermuda, North Korea or Iceland — let’s just say those aren’t exactly key and untapped markets.
The fact of the matter is it has a fairly hefty $108 billion market capitalization — and more alarmingly, MCD stock is bloated by more than a couple metrics.
At current MCD stock levels, McDonald’s sports above-market price-to-earnings multiples of nearly 24 and 20. Fat right? Not necessarily. However, compared to the last few years and multiples ranging from around 17 to 19 since 2011, it certainly appears to be the case.
Further, when looking at the analyst growth rate for MCD stock’s next five years of around 10.50%, that registers as an expensive PEG of over 2.0.
Throw in other historical ratios related to price-to-operating-profit, price-to-sales and price-to-book-value — and McDonald’s is sporting some fat that MCD stock bears can feast on.
MCD Stock Technical View
As seen on the monthly price chart, shares of MCD have rallied nicely since its pre-financial-crisis low and gaining roughly 185% at the recent high scored earlier this month. But the bullish trend in McDonald’s could be finally ending.
To be sure, many market heavyweights have rallied harder than MCD stock over the past several years — and yes, by most measures “the trend is up” as traders say on occasion.
Nevertheless, given MCD’s fatty metrics, a monthly chart bearish shooting star, reversal candle and several months of aggressive, upside momentum into the MCD stock Bollinger Band, this strategist sees warning flags of lower prices.
And now with the daily chart actually cautioning investors with a bear flag formation, it’s time for bears to sink their teeth into McDonald’s.
Over the next few months, a test of MCD stock’s prior highs near $104 is estimated as a reasonable price target for downside testing.
Reviewing the MCD options board, the August $120 put for $2.76 with MCD stock at $123.79 is attractive in lieu of shorting shares.
A bit of downside is required to turn a profit on an expiration basis with this slightly out-of-the-money MCD put. But with a holding period of nearly three calendar months, affordable premiums and the strike price well above our downside price target; it’s a low-fat idea for bearish positioning.
Leaner and Beefier Bull: Sonic Corp. (SONC)
For all the reasons MCD stock is looking to come under pressure in the weeks ahead, shares of SONC sport a striking and bullish contrast.
Sonic maintains P/E multiples of around 22 and 19. That’s not radically less than McDonald’s own multiples. But other differences are very real, bullish, and could make a world of difference.
In our view, given SONC’s comparatively tiny market capitalization of just $1.4 billion, a much lower and fairly priced PEG of 1.2 and price-to-sales of 2.3 — that’s roughly 50% of MCD stock’s — as well as a classic American drive-in theme begging to capture foreign markets in the years to come, SONC is one to own long-term.
SONC Stock Chart
Okay, so maybe I’m dreaming about a global SONC, or one that even sets up shop eventually in Canada or Mexico. But in looking at Sonic’s monthly price chart, there does appear to be room for SONC stock to motor higher.
Unlike MCD stock, shares of Sonic have put in a fair amount of technical testing over the past year and change. In fact, during 2015, the corrective action was deep enough to have produced a successful test of SONC’s pre-financial-crisis highs. That’s bullish.
More recently, SONC has gone through another wave of consolidation after a failed breakout at its all-time-highs. In hindsight, the price action sets up as a double-top.
More importantly, the deep correction in SONC is holding the 50% and 62% retracement levels from the October 2015 and February 2016 lows, as well as the long-term 200-day simple moving average. Now that’s something for bulls to snack on!
Checking SONC stock’s options board, it should be noted liquidity is not the best. However, one idea which fits in nicely with SONC holding support is the June $30/$27.50 bull put spread for a credit of 75 cents or better.
With shares of Sonic at $29.73, this at-the-money vertical stands to collect the entire credit if SONC simply rallies 1% into expiration.
Should SONC bulls prevail, the trader might then consider entering an out-of-the-money bull call earnings spread in July for less than the original spread’s profitable credit.
Bottom line, this combo meal of sorts for bullish investors wouldn’t cost anything — and could generate significantly larger returns as a repeat customer at Sonic in an entirely different way.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.