Shares of McDonald’s (NYSE:MCD) certainly had a roaring start to 2019. MCD stock had risen over 12% and reached a new all-time high of $200 before finally pulling back slightly. McDonald’s stock, though, is beginning to look a little tired and toppy at current levels. The fundamentals and technicals both point to a pullback on the horizon.
MCD reported earnings on April 30 that slightly beat estimates but were down from the year-ago basis.
Yet in that same timeframe, shares have moved higher by nearly 25%. This means McDonald’s stock valuations are now at historically rich levels. P/E is approaching 26, well above the 5 year average of 22.7. Price/Cash Flow is also at a premium and the dividend yield is below average at 2.2%. Price/Sales, which can’t be goosed up by stock buybacks, is now over 7 and at a 10 year high. McDonald’s is certainly not cheap.
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Forward earnings for 202o are expected to come in at $8.68. If we apply the five-year average multiple of 22.7 (still well above the overall S&P 500 forward multiple of 16.8), we arrive at a forward stock price of $195.30 — or almost exactly where McDonald’s stock is trading now. Not exactly a bullish outlook for 2020.
How does MCD Stock Look Now?
McDonald’s stock had become extremely overbought on a technical basis before finally weakening.
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Shares reached the highest readings of the past year on a 14-day RSI basis. MCD was trading at a big premium to the 20 day moving average before reverting back. Momentum has cooled dramatically after reaching a peak. MACD just issued a sell signal as well.
MCD stock traded up to the $200 — exactly — on an intra-day basis before reversing to close well off the highs off the day. This type of price action many times is the sign of a short-term top, especially following such a strong rally. The buyers may finally be exhausted and momentum has been broken.
Stock traders should look to use any rally to short MCD stock. Option traders may want to consider selling the June $200 calls and buying June $205 calls for a $1.50 net credit. Maximum gain on the option trade is $150 per spread. Return on risk is 17.64%.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
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