This Favorite Stock Just Got Kicked Off My “Buy” List

Keith Fitz-Gerald Nov 19, 2014
26 

This has been one of my favorite stocks for over 10 years.

I’ve called it a rock-solid investment, a powerful income play, and a global challenger that would be able to outmaneuver the competition to react to changing consumer preferences around the world. I’ve recommended it as a “BUY” twice to my Money Map Report readers, who had the chance to see great returns of at least 42.90%.

Just last year, I named it as one of just a handful of companies that could survive a U.S. sovereign debt crisis.

Even amid a 3.7% decline in August same-store sales, I remained bullish.

But even I can’t get past what just happened.

Here’s why one of America’s most iconic stocks just got kicked off my “BUY” list…

McDonald’s Corp. (NYSE:MCD) has survived and thrived amid plenty of challenges before. It’s been challenged by sagging sales, overseas problems and lackluster company leadership plenty of times since being founded in 1940, outlasting wars, recessions, and now the Financial Crisis.

But the news I’ve seen in recent weeks feels different – and in fact, the setbacks I’ve seen are enough to trigger what I call the “Ultimate Trailing Stop.”

That was one of the first tactics we explored here.

It’s the ongoing mental check every investor should perform with every stock they hold to see if the value they originally paid for – what made it a worthwhile investment – is still there.

Unfortunately for McDonald’s today, the answer is “no” – at least for me, anyway. That’s because for all the problems the stock has around the world, the root of its problems is here at home.

Why a More Expensive Menu Troubles Me

If you enjoy an occasional stop at the Golden Arches as much as I do, you’ve probably noticed that almost everything from Big Macs to soft drinks has gotten incrementally more expensive.

The famous “dollar menu” has been ravaged in the last 18 months, as more and more items inch up past the $1.00 price mark.

Overall the prices at McDonald’s increased by more than 3% from June 2013 to July 2014, an increase that’s well above the 2.5% rise in prices Americans paid for food outside their homes in that time frame, according to the Bureau of Labor Statistics.

So much for a “value” meal.

My guess is that there’s something else at work, too…

I suspect that McDonald’s has also been raising its prices to compensate for falling sales.

For a company whose biggest threat is posed by competition from other fast-food giants, that’s a terribly wrong-headed strategy. McDonald’s niche customer base – the middle class – has already been hammered by a shaky economy. There may be a lot of residual consumer loyalty in the U.S. when it comes to the McDonald’s brand – but many millions of customers are more than happy to visit Wendy’s or Burger King instead if they perceive a better deal. I’m sure IHOP, Chili’s, Red Robin, Five Guys, and dozens of other hamburger joints would love to capture more wallet share.

Even if only a small-seeming amount of customers are turned off by the price hikes, the corresponding dent in sales will have a ripple effect on company profits as higher prices lead to fewer customer sales and lesser profits.

With 40% of McDonald’s global customer base coming from the pinched U.S. middle class, I think that’s the inevitable outcome – and it’s not at all clear that the company’s newly appointed president for the U.S. operations, Mike Andres, understands this.

Even so, the sagging sales in the U.S. aren’t exactly a recent phenomenon – and they were partly excused by the company’s aggressive overseas expansion. In particular, I’ve been impressed by the growth McDonald’s has been laying the groundwork for in China, which is poised to see an 800% increase in the ranks of its middle class between 2010 and 2020.

Unfortunately, the news is also worrisome on this front.

Russia and China Could Pull the Stock Even Lower

In the summer of 2014, the tainted meat scandal in China looked like a body blow for the Q2/2014 earnings report, but little beyond that.

It certainly was painful for investors looking at Q2/2014 earnings, as executives reported that sales in China fell 22.7% in the last quarter. But even more ominously, these same executives admitted that they believe it will take six to nine months for business to regain the ground it lost in the Chinese, Japanese, and Hong Kong markets.

Meanwhile, health agencies in Russia are investigating more than 200 of the 440 McDonald’s stores there – and they’ve already shut down nine of them since this summer.

Ostensibly, the reason for this is a potential violation of Russian health and safety regulations. But Putin has been known to target American companies as retaliation for sanctions levied against his government. That’s why it’s probably not a coincidence that the Kremlin is punishing a famous American company at the same time the Russian economy is feeling the sanctions imposed by the U.S. and Europe following its actions in the Ukraine.

Whatever the reason – health and safety concerns, or political spite – Russia’s actions against McDonald’s are just another reason not to be optimistic about the short-term outlook for the stock.

And that brings me to an important point. Perhaps even THE point.

Dump MCD (and Others Like It) in Favor of the Six “Unstoppable Trends”

There’s no doubt food is a “must-have” commodity. Everyone has to eat and always will.

What’s more, food prices have been soaring lately, along with population, as available farmland dwindles around the world.

So you’d think MCD would seem to fit perfectly within our six “Unstoppable Global Trends,” as a part of both Demographics and Scarcity/Allocation.

In reality, though, fast food is a consumer discretionary expenditure – and that means that external forces could easily derail revenue and profits at the same time.

If you really want to tap into food as part of our unstoppable chain, you’ve got to go plow more fertile ground.

My suggestion is that you consider companies like CNH Industrial NV (NYSE:CNHI). That company is a global leader in the manufacture of agricultural and construction equipment, like tractors and combine harvesters. It remains absolutely vital to the boom in agricultural investment around the world, for self-evident reasons.

Speaking of which, I first recommended the company to Money Map Report subscribers in 2010. Since then, they’ve had the opportunity to capture gains of at least 100% and log a “free trade” to boot – a concept we talked about last week.

If you’re just learning about CNHI, don’t worry about missing the trade. You’ve got plenty of time to harness the world’s hunger. I think it’s going to be a terrific opportunity for years to come.

Remember, geopolitical flare-ups and tensions can’t derail our Unstoppable Trends, even if they can undercut once powerful companies like McDonald’s in the shorter term.

Best regards for great investing,

Keith

26 Responses to This Favorite Stock Just Got Kicked Off My “Buy” List

  1. Barry says:

    afternoon Kieth

    1. Is CNHI a recommendation & if so what are the guidlines , its been basing foir a month or 2 but down 27 % for the year

    2. Given that HAL is buying BHI if it gioes through, & its large drop since, what do u think of the aquisitioin & combination and how does it effect the lowball buy trade u have advised on

    Thanbks as always, Barry

    • Keith says:

      Good afternoon Barry.

      Thanks for asking…both are great companies I’ve recommended to paid up members of the Money Map Report and Strike Force so it would be in appropriate and unfair for me to reveal the precise trade instructions here. That said, I won’t dodge the question either.

      With regard to CNHI – yes, it’s a recommendation. Beaten down stocks that have built a strong trading base can be superb and explosive gainers when the right catalysts are in place.

      With regard to HAL and BHI – I believe HAL got a screaming deal and that the merger is a super indication that there’s a lot of strength to be had in the U.S. oil/energy space.

      Best regards and thanks for being part of the family,

      Keith 🙂

  2. Dennis Pollack says:

    Hey Keith,
    Great “food for thought on Mickey D”s.
    I prefer Yum Brands for its restaurant diversity and it serves up a growing dividend.
    I received shares when it was spun off from PepsiCo.

  3. Barry says:

    Kieth, speaking of food

    Ps may i recommend on the food trend Flower foods ,FLO, Have a free ride and up 200 % since 5/23/2005

    Yes its a long term position, that includes a downturn of 15 % recently

    also Denny’s DENN up 135 % since 3/25/2010 qqnother free ride

    Barry

    • Keith says:

      Thanks for sharing Barry.

      Those are both great trades and the fact that you’ve harnessed them by converting into the Free Trade Tactic I highlighted a few columns back is tremendous.

      U-rah!

      Best regards, Keith 🙂

  4. Ted says:

    Good points but you should not be eating at Macdonalds most of the food is not healthy

    • Fallingman says:

      In fact, it isn’t “food” by any honest definition. It’s phude, masquerading as the real thing.

      • Keith says:

        Hi Ted and Fallingman.

        I am guilty as charged…but then again that’s why I exercise so much!

        Best regards and thanks for being part of the family, Keith 🙂

        PS: The beer and Big Mac combo is pretty good in Vienna – perhaps the U.S. menu planners should take a hint.

  5. Henry says:

    Does your reasoning re McD also apply to Arcos Dorados, their franchisee in the Caribbean, and Latin /South America?

    • Keith says:

      Hello Henry.

      That’s a very insightful question Henry and one that I’ve not yet completely answered in my mind because the variables are totally different. I’ll provide an update in a future column.

      Best regards, Keith 🙂

  6. Michael Upper says:

    Keith

    Regarding McDonald’s….then there is the lack of social consciousness on the part of McD’s management that ignores public demand for organic non-genetic modified organism (GMOs) food, the brutality and barbarism associated with confined animal feeding operations (CAFO), and food that was grown and/or used in production of McDonald’s food with pesticides and herbicides that have poisoned the Earth’s water, land, air, birds, fish, animals, and humans. Oh! I forgot to mention the meat that is raised using growth hormones, etc., etc.

    Gee! I wonder why such a great company could be having problems and a miserable outlook.

    Michael Upper

    • Keith says:

      Thanks for commenting and for being a part of the family Michael.

      Youch! I’m guessing you’ve researched this a bit.

      All joshing aside, you raise some very salient points. Any management team that has lost sight of its cutomers runs the risk of alienating them. The healthy foods movement is very real and companies that don’t make appropriate adjustments will come under intense scrutiny.

      Best regards, Keith 🙂

  7. Mike says:

    Just something to think about with the McDonald’s price hikes. I have been observing inflation for a few years now. Remember fuel prices have been high, thats going to trickle throughout the economy. The price of eggs shot up a few years back. maybe 3 years ago I saw a can of anchovies at Publix go from around $1.30 to $1.80 in a week. Recently, within the past month, I saw Healthy Choice microwave meals at Walmart go from $2.00 to $2.50 in one week. It wasn’t that long ago when you could find dealer advertisements in Sunday newspapers for a new Ford F-150 for less that $10,000. Priced one recently? Also 3 years or so ago I was getting on a regular basis at Wendy’s, a baked potato, small bowl of Chili, and a salad. It came out to around $3.18. One day I walk in and that same order is over $4.00. And that happened from one week to the next.
    I think maybe you have it wrong. Maybe McDonald’s isn’t raising prices due to lack of business but due to coast of business. All companies are subject to this. There’s been massive food inflation going on, all companies dealing with the food sector have to raise prices. Basic business: You have to sell your product for more than it costs to make. If the price of raw ingredients go up, unless you can find expenses to cut somewhere, then you must raise the price of your final product.
    Fuel prices have recently dropped. If the price stays down then maybe price hikes will stop, but it will have to stay down to make a difference .

    • Keith says:

      Excellent points Mike! Thanks for taking the time to note ’em and for being part of the family.

      Best regards, Keith 🙂

  8. Mike says:

    Also who knows how hard some of these companies are getting hit by Obama Care. Once again when the cost of doing business goes up, the only way for a company to survive is to pass those costs on to the consumers of that companies products. Same thing with with taxes. If business taxes are increased the company has to replace that drain of revenue. Guess how they do that? Pass it on to consumers of their products as price hikes.

  9. sam says:

    i purchased ktos @6.71 cost that stock keep on going down i am down big on it you think double up here or cut my losses?

    • Keith says:

      Hello Sam. Unfortunately, it would be inappropriate for me to provide individualized financial advice, not to mention illegal.

      That said, what I would tell any investor posing a similar question is to consider two things:

      1) is the stock a longer term hold and, as such, are the reasons you bought it intact? If so, short term volatility is irrelevant.
      2) has the stock triggered a trailing stop or lost enough that you are worried? If so, it may make sense to cut and run. You can always reenter at a later date or move on to other opportunities.

      Best regards and thanks for being part of the family, Keith 🙂

  10. sanjay says:

    Dear sir/madam
    can u suggest me which scripe I have investe in indian mkt listed in nse & bse

    • Keith says:

      Hello Sanjay.

      Unfortunately, I am not certain what you are asking here. Perhaps you can rephrase the question when you have a minute?

      Thanks for being part of the family and best regards, Keith 🙂

  11. Dave says:

    Don’t forget that minimum wages across the country are going up in the coming years as uninformed voters continue to vote for higher rates. This will inevitably cut into profits of companies such as MCD that in the past has been an employer of teenagers and others entering the job market.

    • Keith says:

      Hello Dave.

      The law of cycles and unintended consequences is running wild at McDonalds in part because of company decisions but also, as you point out, because of larger macro issues.

      Thanks for being part of the family.

      Best regards,

      Keith 🙂

  12. Alfred L Moniot MD says:

    Hola Keith,
    I’m 70 in two weeks: agree with Michael, and have not had any fast food JUNK in 40 + years.
    I don’t personally invest in “retail”.
    retired expatriate (11.5 years in Conde Nast’s 2013 “World’s Best City)

    • Keith says:

      Hi Doc and thanks for being part of the family.

      Your points are extremely well taken. And, San Miguel de Allende has always been one of my favorite cities. The food, the culture, the people…it’s a beautiful place and you are very lucky to be there. Congratulations!

      Saludos y gracias, Keith 🙂

  13. Martin says:

    I would think the dividend would keep supporting the stock.

  14. Philip Rodi says:

    whar happen to EKSO today and do you still see it as a good hold? in two day we dropped 20 Cents a share.

Leave a Reply

Your email address will not be published. Required fields are marked *