Where McDonald's (MCD) Stock Goes Next May Depend on Where Wendy's (WEN) Goes

Of all the things we've lost in the midst of this coronavirus outbreak—the ability to go into a store when we pleased as opposed to some kind of ranked schedule, the ability to sit down and enjoy a meal somewhere other than our homes, and so on—the ability to enjoy a Big Mac would seem to be one of those that would never fade away. However, with McDonald's (NYSE: MCD) reporting a sales disaster in the making, all eyes are now turning to one of McDonald's closest competitors, Wendy's (NASDAQ: WEN), for a look at the potential future.

A Dietician's Dream is McDonald's Nightmare

The last few weeks have been rough on McDonald's, with dining room trade apparently making up a lot more of McDonald's bottom line than some may have expected. Same-store sales worldwide dropped 22% in March, reports note, as lockdowns of various stripes nationwide shut down everything but drive-thru and delivery operations. Since McDonald's exposure to delivery has been comparatively slim—it's no Domino's Pizza (NYSE: DPZ), after all—that left it with pretty much drive-thru service only.

McDonald's share prices have been on a whipsaw of volatility lately, ever since late February, when the graph went from a fine-tooth saw blade in a range of roughly $20 to a vision of madness that traded between $207 and $137. McDonald's has been recovering its way back up to that tighter range since late March, but it's clear that there's still a lot of volatility baked into the individual apple pie, so to speak.

Whither Wendy's, Whence McDonald's?

This is the part where Wendy's comes into the picture. Taking a look at the Wendy's graph is almost enough to make you wonder if some kind of graphical error took place in your favorite stock market search function, only with skewed numbers.  Before the outbreak, Wendy's was holding an incredibly tight trend line, hovering at about the $20 mark with no more than a couple dollars' worth of variation in any given month.

Then, of course, coronavirus hit and share prices plummeted down to a low of $7.47. Share prices are on an upward trend and have been since March 18, where that low point hit, a graph that looks almost exactly like McDonald's did.

This is prompting many to wonder if Wendy's won't prove the canary in the coal mine for McDonald's stock. As the news started to turn more positive—reports of reduced cases of coronavirus, the rise of hydroxychlorquine as a therapeutic, several vaccines undergoing testing—recovery kicked in, and the recovery had legs. Now,if Wendy's—which was basically McDonald's less an order of magnitude, give or take—could maintain its levels, or even continue gaining, it stood to reason that further gains could follow. We even figured Wendy's as a stock to buy about a week ago.

McDonald's Performance By Itself a Good Sign

However, even leaving aside the Wendy's connection, it's clear that McDonald's is a good sign for the overall market. Tocqueville Asset Management's portfolio manager John Petrides noted that, while earnings season is likely to be a disaster, there are indeed good signs that the economy we had three months ago could, ultimately, come back.

Petrides also noted that, despite Wendy's recovery and attractive pricing, it may not be worth the buy. Petrides pointed out Wendy's lack of scale and size, and the leverage currently found on its balance sheet. He also noted that there were “enough high-quality companies on sale” that made buying Wendy's a less-than-attractive play.

Our own research, meanwhile, suggested that McDonald's was a buy almost two weeks ago.

Can We Get Back to Where We Were Three Months Ago?

It's easy to forget, after all this coronavirus frenzy, that just three months ago—back in early January—things were about as normal as you could get, aside from some bizarre weather and unusual geopolitical tensions. The recovery that we're starting to see in some stocks is a good sign, and the sheer amount of effort the government has put into getting things back on track—in some parts much more so than others—is also encouraging.

If we can get consumers back and shopping, if we can get people back on the job, if we can get companies opening their doors, there's very little to suggest that we can't get back to where we were only a little while ago. Coronavirus has temporarily halted the United States, in large part. With the spread slowed and the curve flattened, we should be able to recover.