McDonalds Set To Capitalize On Shift To Value Stocks

In hindsight, shares of McDonalds (NYSE: MCD) were among the most obvious buys this time last year when markets were in a pandemic induced freefall. The 40% drop seen in the stock, and the subsequent rally to fresh all-time highs, will no doubt come to be looked back on as one of the great buying opportunities of all time. With the clarity of hindsight vision, a low-cost and reliable fast-food business was always going to be one well insulated from a recession.

For those of us who missed the boat, however, there’s plenty to suggest that we’re now looking at an equally strong entry point, if not as obvious.

Before the bell rang to start Wednesday’s St. Patrick’s Day session, Deutsche Bank were out with an upgrade to the home of the Big Mac burger, moving shares from Hold to a Buy rating. With shares having traded sideways for much of the past six months, they think the time now looks right for a fresh rally to start. With economies continuing to reopen and the likes of New York increasing indoor dining capacity limits to 50% this month, Deutsche thinks there’s an “under-appreciated” opportunity for McDonalds to capture even more market share.

A fresh price target of $244 suggests upside of around 10% from where shares closed last night. This would put them well above their most recent all-time highs from September and would also serve to concisely close the chapter on the pandemic for McDonalds at least.

Positive Trends Overall

In a similar vein, Baird was out with positive comments on the restaurants in general yesterday too. On the back of a survey they see a strong recovery in industry comparable sales starting to kick off. In a note to clients, they added ‘we expect demand trends to improve sharply in upcoming weeks (including on a two-year basis) behind the positive consumer spending impacts from government stimulus checks (benefits should become evident this week)."

It’s this angle that had Morgan Stanley listing McDonalds as one of their “Upside Surprise” stocks at the end of last month, in a list that explored as yet undetected potential for companies well-positioned for a post-COVID landscape. McDonalds was the only restaurant to make the list, underlining the strength of the company and its hold on the market.

Value Beating Growth

For all this though, their shares are still only just starting to lift their head up, having drifted sideways and almost downwards since October. But with yesterday’s 2% jump they’re now up more than 10% since the first week of March and are at their 2021 highs. A large part of this is surely due to the ongoing rotation out of high-growth tech names and into more dependable, and perhaps more realistically valued, companies. With a price-to-earnings (P/E) ratio of 35, you’d be hard-pressed to call McDonalds overvalued when compared against the likes of Tesla (NASDAQ: TSLA) who can boast of a 4 digit P/E figure.

We’ve seen the Dow Jones Industrial Average index, of which McDonalds is a component, smoke the tech heavy Nasdaq index in recent weeks. With yields continuing to rise, we can expect value to continue outperforming growth for some time yet.

This recent pop is a solid bit of momentum for investors thinking about getting involved some of these days to buy into, with a well-established support line around the $210 mark to fall back on if markets take a turn. To the upside, September’s $230 high is the first target and there’s less than a 3% move needed to take them there.