McDonald’s Added to Top Stocks for Q3 at RBC

Even with the benchmark S&P 500 index up more than 40% from the lows of Q1, many on Wall Street are preaching caution in the face of this stunning recovery. Coronavirus cases are still surging across the country and many states’ reopenings are being rolled back or canceled.

With the Fourth of July’s fireworks still patiently waiting to be set off, RBC said in a note to clients on Friday, that “even as economies have begun to reopen, this gradual return to normalcy has seen instances of new spikes in cases, which may lead to a slower economic recovery than initially anticipated.” Part and parcel of the firm’s cautious tone was their release of the much-watched ‘Top 30 Global Ideas’ which is usually published annually. However, given the level of volatility and unpredictability present in markets this year, they’ve started updating it on a quarterly basis. 

In their note, they added, “changes this quarter reflect a rotation out of companies that have seen a solid rebound or structural change to our thesis, into some names that have attractive upside opportunity as the recovery progresses.”

So while most investors had closed down their computers and were sparking up the barbeques and cracking open some cold ones, RBC was wasting no time in getting out their list of top stocks to watch in Q3, one of whom is McDonald's (NYSE: MCD).

Strong Bounce

For many on Wall Street, it wasn’t that easy to be bullish on the maker of the Big Mac for much of the first quarter. With the overnight shutdown of non-essential businesses, fast food outlets like McDonald's were one of the first to see their revenue streams turned off. When the flight from equities was at its height, it was hard to see a neutral outlook for shares let alone a bullish one.

Still, it has to be said that from the lows of March through the first week of June, McDonald’s’ stock went on to rally more than 60%. While this didn’t completely undo the 45% drop from the highs that the stock experienced in February, it did reclaim much of the lost territory. Pre-COVID, shares had been on track to reach all-time highs previously tagged last August and as Q1’s dip was bought, investors were clearly backing the stock to get back up there. Though the stock has cooled off about 10% from June’s highs through last week, momentum remains with the bulls.

Bullish Long Term

RBC analyst Chris Carril struck a bullish tone in a note to clients last month when he said that McDonald's “is well-positioned for the industry’s potential shift back toward a value focus in a more challenging macro environment, given the brand’s historical strength in core, everyday value.” In the past month, almost all of McDonald’s restaurants have reopened at least the drive-through option and there have been numerous reports of lines around the block as consumers rushed to satisfy their cravings for a quarter pounder with cheese.

Last week, Carril doubled down on his June call when he said “we see MCD at current levels as an attractive opportunity. We are confident in current leadership’s ability to guide MCD through disruption and believe overall strategy -- marked by asset base and technological improvements -- will remain intact”. His message is clear. Even with sudden short term volatility as a threat in the near term, over the longer-term McDonalds has the wherewithal to come out on top.

RBC gave shares a fresh $220 price target which represents a 20% move from where they closed on Thursday. Coincidentally, or not so coincidentally, this would also be right around the level that shares traded at before the coronavirus crash and at the all-time highs that they set at the end of last summer.