Very few people on this planet are unfamiliar with what the golden arches on top of a restaurant building mean. McDonald’s (NYSE:MCD) is a world leader in fast food and an innovator at that. Its success meant that it now has a lot of competition, but you just can’t beat the original. This is all to say that MCD stock for the long term remains a buy.
When companies execute so well on plans and for so long, they earn the benefit of the doubt on Wall Street. McDonald’s stock recovered well off the quarantine crash, with a more-than-60% rally from the March bottom to the top on June 8. Since then, the price has dropped back about 10% but that seems part of normal price action.
All bullish bursts need corrections, otherwise the stocks become too frothy and fragile. The bulls are still in charge of MCD stock because they continue to establish higher-lows. The next battle between the buyers and the sellers will be near $203 per share. But the first job for the fans is to hold above $170 so not to risk losing the reins.
MCD Stock Strategy is to Rinse, Repeat
I remember suggesting here in April 2018 to buy the McBounce after its earnings. It rallied steadily from there and delivered up to 30% in gains. Back then the stock had just corrected from highs and was in similar relational spot as it is now. The idea here is to stick with what worked in 2018 and get long in an iconic restaurant company. The stock is headed higher into 2021.
When investors panic, they overshoot in both directions. The crash from the quarantine went too far. McDonald’s lost almost half of its value in less than three weeks. It should have found footing at $156 per share but that was a test like no other. In most cases, extreme highs and lows are wrong and somewhere in the middle lies the truth. The long-term trajectory of MCD stock remains consistently bullish.
The current swoon is not a reason to panic out of it even if it is not the absolute bottom. In fact it is at or near a level where it becomes solid buy. This is especially true for those who have a long-term perspective on equities. It’s hard to time entries perfectly, otherwise I would wait until MCD stock comes closer to $170 per share.
Since there is so much risk still facing the global economy, it might make sense to only take half positions now. It also might be smarter to implement the trade using the options where I can create income regardless of rally. Investors can sell McDonald’s December $145 put and collect $5.50 per contract. This is a bullish position that doesn’t even require a rally to win. In fact there will be profits even if MCD stock falls 20%.
If for whatever reason the stock market crashes and this stock falls way below the Covid-19 bottom, then the break-even point for this trade would be closer to $139 per share. For that to happen it will take a special kind of circumstance and I just don’t see it with today’s data.
You’ve Got Options
The debate over using options is misunderstood because too many investors still believe that options are dangerous, when in fact they are not if done properly. Nevertheless today’s opportunity is for both styles of trading. Traditional investors can initiate partial positions in the underlying stock. Alternatively options traders can sell puts for much higher odds of success.
Regardless of styles, it is imperative that investors consult the charts before any trade. The short-term MCD stock charts suggest that once it fell to $185 per share, it triggered a bearish pattern that is currently unfolding. Its ideal target could close the open gap near $174 per share. Should this happen it would be part of normal price action that does not change the overall outlook of this company.
Valuation matters but it’s not the only reason to buy a sock. McDonald’s is not cheap because its stock price is 6.7 times its yearly sales and has a 24x price-earnings ratio. Although this is a bargain compared to burritio-maker Chipotle (NYSE:CMG), neither of these two metrics is a screaming bargain. But sometimes cheap is not what investors should seek.
In summary, MCD stock is not precariously perched like many high-tech sectors right now. It is a viable bullish trade but there’s no rush to jump in with both feet. Moreover using the options could eliminate the uncertainty by initiating a short put trade immediately.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
As of this writing, he did not hold a position in any of the aforementioned securities.