When it comes to McDonald’s (NYSE:MCD), both Wall Street and Main Street aren’t exactly loving it right now. McDonald’s stock has been pulling back in recent months. The recent release of mixed quarterly results has given the market more reason to bail on the fast food giant’s shares.
On Main Street, public chatter about how overpriced the company’s menu items have become continues to climb. This, coupled with customer traffic numbers provided in financial releases, has fueled further Wall Street pessimism about future growth and profitability.
Yet while it’s clear all is not well at the “Golden Arches,” that doesn’t mean you need to avoid MCD shares at all costs. In fact, this wave of bearish sentiment could be creating a long-term buying opportunity.
2 Reasons Why McDonald’s Stock Can’t Catch a Break
Year-to-date, McDonald’s shares have declined by around 13%. While not a horrendous drop on an absolute basis, this represents significant underperformance, when you consider that major indexes like the S&P 500 are up by double-digits during this time frame.
There are several factors driving this continued pullback for McDonald’s stock. First, it’s clear that customers are doing more than just complaining about higher Big Mac and Happy Meal prices. Higher prices are turning off lower-income customers already squeezed by high inflation, resulting in a further slowdown in sales growth.
Second, investors aren’t wholly convinced McDonalds’ plan to fix this issue will pan out. While its plans to reverse the sales slowdown may have prevented shares from experiencing an immediate post-earnings plunge, the market has given said plans second thought.
It hasn’t helped that franchisees have been balking at a key element of this turnaround. That would be plans to roll out a $5 value meal, starting next month.
Again though, instead of following the market’s lead out of MCD, you may want to go contrarian instead. There’s a silver lining with recent weak results. Also, MCD’s valuation is arguably veering toward value territory, considering McDonalds’ blue-chip status.
The Recipe for a Rebound
It’s unclear whether McDonald’s stock will find a near-term bottom, or if shares will continue to drop back below $250 per share, as MCD did last fall. However, if weakness persists, you may end up being able to buy in at a “can’t miss” price.
That said, even if you were to buy in today, there’s big opportunity for strong returns over the next few years.
Weak demand growth in the U.S. has a role in McDonalds’ underwhelming results, but it’s not been the only factor. Another factor has been boycotts of McDonald’s in numerous overseas regions, related to the ongoing Mideast Conflict.
Although there’s little end in sight to the conflict, this headwind may not necessarily persist indefinitely. In the quarters ahead, the impact of these boycotts could dissipate. McDonalds’ continued expansion in fast growing developing market economies could also help to outweigh this challenge.
That’s not all. Despite mixed confidence in management’s turnaround plans, the company may indeed have a viable recipe for a rebound. As InvestorPlace’s Yiannis Zourmpanos recently pointed out, other efforts by McDonald’s to gin up demand, like creative marketing initiatives and menu upgrades, are starting to have a positive impact.
Bottom Line: Yield, Value, and Growth Potential Makes MCD a Buy
With investors already bracing themselves for disappointment, merely meeting expectations could be enough to drive a bounceback for MCD. Shares could move higher in line with earnings growth, plus rerate back to a higher multiple.
McDonald’s today trades for 21.5 times earnings, but in prior years has traded for around 25 times earnings. While waiting for the rebound, you can collect a steady return, courtesy of MCD’s 2.59% forward dividend yield.
This “dividend aristocrat” has a long track record of dividend growth, with payouts increasing by an average of 8.01% annually over the past five years. Don’t get me wrong. MCD isn’t going to make a “to the moon” type move if sentiment improves.
However, if you’re looking for a blue chip stock that may outperform comparable names once it gets out of its slump, McDonald’s stock is currently one of the best choices out there.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
