Will McDonald’s Continue To Surge Higher?

With shares of McDonald’s (NYSE:MCD) trading around $99, is MCD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

McDonald’’s franchises and operates McDonald’s restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America, so just about every part of the world. Its restaurants offer various food items, soft drinks, coffee, and other beverages, as well as breakfast menus. The products provided by McDonald’s fulfill cravings at competitive prices in convenient locations worldwide. The McDonald’s craze shows no signs of slowing, so the company has continued its expansion to just about every country on the globe. As consumers continue to enjoy the McDonald’s products, look for it to see rising profits.

T = Technicals on the Stock Chart are Strong

McDonald’s stock has witnessed a powerful surge higher in its stock over the last decade or so. The stock is now pulling-back slightly from all-time high prices so it may need some time before it gets going once again. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, McDonald’s is trading around its rising key averages which signal stabilizing price action in the near-term.

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MCD

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of McDonald’s options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

McDonald’s Options

17.59%

70%

68%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Average

Average

August Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on McDonald’s’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for McDonald’s look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

2.44%

3.83%

-1.38%

-2.22%

Revenue Growth (Y-O-Y)

0.90%

1.90%

-0.19%

0.15%

Earnings Reaction

-1.95%

0.57%

-4.45%

-2.88%

McDonald’s has seen increasing earnings and revenue figures over most of the last four quarters. From these numbers, the markets have grown to expect more from McDonald’s earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has McDonald’s stock done relative to its peers, Yum! Brands (NYSE:YUM), Burger King (NYSE:BKW), Wendy’s (NASDAQ:WEN), and sector?

McDonald’s

Yum! Brands

Burger King

Wendy’s

Sector

Year-to-Date Return

12.49%

9.53%

23.66%

27.66%

13.46%

McDonald’s has been a relative performance leader, year-to-date.

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Conclusion

McDonald’s is a well-recognized company that fulfills cravings and demand for quick and delicious food choices that many consumers across the globe enjoy. The stock has been steadily chugging higher but is now pulling-back a bit from all-time high prices. Over most of the last four quarters, earnings and revenue figures have been on the rise, however, investors have grown to expect a little more from the company. Relative to its peers and sector, McDonald’s has been an average performer, year-to-date. Look for McDonald’s to stabilize and OUTPERFORM.

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