Schaeffer's Trading Floor Blog

Weekly Contrarian: McDonald's Bulls Should be Wary

MCD suffering from fundamental, technical woes

by 7/26/2012 7:45 AM
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Publication title: Is McDonald's a Buy After Earnings?
Publication date: 7/23/2012

Brief Summary

With McDonald's being the latest restaurant-related victim in a string of earnings-induced swoons, the author begs the question: Should you stay with the stock or is it time to go? In the long term, the author touts MCD's growth potential -- citing the company's available capital, and the expectations of a 10% dividend hike in September -- as appealing and encouraging attributes.

In the near term, however, macroeconomic concerns should have traders taking a cautious stance toward MCD. The author points to rising food costs -- due to the severe drought affecting the Midwest United States -- as a short-term hurdle facing the fast food maven. Additionally, she notes that MCD's CEO Don Thompson specifically cited the most recent "decline in sales to a weak global economy and low consumer confidence," as well as "pressure in the euro zone as major headwinds."

Contrarian Takeaway

After ringing in the new year above the psychologically significant century mark, MCD has stumbled. The equity has been stair-stepping its way down the charts, and has given back 12.3% on a year-to-date basis. The stock's most recent rally attempt was met with a firm dose of rejection from its 80-day moving average, and the 2.9% post-earnings plunge MCD endured last Monday only poured salt in the wound.

Wall Street's holding onto to the glory days, though, as sentiment surrounding the security indicates enthusiasm toward MCD. In the options arena, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX have bought to open 142 calls for every 100 puts during the previous 50 trading sessions.

Elsewhere, short sellers have done an about-face recently, reducing their bearish exposure on the equity by 2.6% in the latest month. Short interest now accounts for a low 1% of the stock's float, and it would take fewer than two days to cover these shorted shares, at MCD's average daily pace of trading.

The brokerage bunch has done their fair share of doting on the Dow darling, as well. The stock currently sports 15 "buy" or better recommendations, compared to nine "holds," and not a single "sell." What's more, the consensus 12-month price target of $99.67 is not only perched near the tough-to-crack century mark, but also in territory MCD has not seen on a daily closing basis since March 7.

Going forward, MCD could be poised to meet some speed bumps in the short term. Any further capitulation by the bearish brokerage bunch could prompt a fresh wave of selling pressure -- exacerbating the stock's year-to-date slide.

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