Although I can understand the longer-term case for McDonald’s (NYSE:MCD), I’ve never in my adult years liked their food. However, curiosity got the better of me in recent months, and I decided to give their offerings a chance. Surprisingly, my InvestorPlace colleague Will Ashworth was right: their food has improved significantly, which theoretically bolsters the case for McDonald’s stock.
Actually, it’s not theoretical at all. Just pull up a recent chart of MCD stock, which proves that many investors are loving it. Since the beginning of this year, shares have jumped decisively into double-digit territory. Granted, the fast-food giant suffered turbulence early into 2019, but since mid-February, MCD gained more than 8%.
At the same time, McDonald’s stock has risen against significant headwinds. Millennials no longer care about the brand, and demographically, this circumstance will likely worsen. Among burger joints, the “Golden Arches” is losing out to Wendy’s (NASDAQ:WEN) from a consumer sentiment standpoint. Finally, other fast-food brands like Domino’s Pizza (NYSE:DPZ) compete fiercely for those fickle consumer dollars.
Seemingly, if there’s any time to sell MCD stock into strength, it’s right now. And that’s exactly what I’m going to tell you. Here are three reasons why:
Shrinking Markets Will Strangle McDonald’s Stock
In my studies regarding technical analysis, one of the clear signs to watch out for is lack of confirmation. Typically, if shares rise, you want to see volume lift higher accordingly. If not, you have a mismatch: the volume is not confirming the bullishness in the share price.
With McDonald’s stock, we have a similar dynamic. Indeed, shares have been rising while overall volume levels have declined. But I’m more interested in the fundamentals not matching technical enthusiasm. For me to get interested in MCD at this juncture, I need to see a viable growth plan. Unfortunately, I see the opposite.
Most people who follow MCD stock realize that annual revenues have steadily declined for the better part of this decade. Of course, this is to be expected as management wrestles with a changing landscape in the fast-food industry.
What isn’t expected, though, is that the iconic burger joint hasn’t made progress in any market. Since 2013, the domestic segment revenue is down more than 13%. Leading international markets are down 11%. High-growth regions are down more than 43%. Finally, what MCD calls foundational markets and corporate sales are down nearly 52%.
The one small exception is leading international markets since 2016, which has produced modest sales growth of 5.3%. But that’s just too pedestrian to justify the soaring McDonalds stock price.
No Viable Opportunities with Millennials
I have some simple math for you, not the fuzzy kind that former President George W. Bush likes: millennials represent the largest demographic in the U.S. labor force. If you’re going to win in any retail segment, you must win over millennials.
But as I previously mentioned, the McDonalds brand hasn’t remained relevant. But it’s not just about the failure to bring customers into their stores, which is already bad enough. Instead, the company no longer has social cachet.
According to a Quartz article from two years ago, only 20% of millennials have ever tried a Big Mac. If you’re one of the 20%, the Big Mac is the company’s marquee burger. Do I have to even have to explain what that tells you about the longer-term challenges awaiting McDonald’s stock?
If that’s the case with millennials, what about the incoming Generation Z? Furthermore, as millennials start having babies, those future consumers will likely not care at all about the fast-food icon. Of course, that’s way down the road, but you get my point: If you can’t win the young market, it’s unlikely you’ll resonate with the younger market.
Signature-Crafted Volatility for MCD Stock
Just recently, management made a startling announcement: they’re getting rid of their signature-crafted burgers. Instead, they’ll focus on simpler (i.e., cheaper) quarter-pounder options.
Earlier, when I said that I tried their food for the first time in a long time, I was referring to the signature-crafted burgers. Especially for a fast-food joint, they’re a cut above the competition. I was genuinely impressed. However, it doesn’t matter what I think if other customers aren’t buying them.
Of course, management put their corporate spin on the issue. They’re claiming that they’re focusing on what their customers want, which is great. The problem here is that MCD tacitly admitted that their consumer base is declining. Worse yet, their efforts to capture the youth market have failed.
I’m not saying that MCD stock is a bad investment. What I am saying is that it’s a bad investment at over $190 a pop. The company needs a compelling growth narrative to have me interested. Right now, it does have such a narrative, but only for the bears.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
