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Was The Smart Money Right About McDonald’s Corporation (MCD)?

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Debasis Saha
·6 min read
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In this article we will analyze whether McDonald's Corporation (NYSE:MCD) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market by double digits annually.

Is McDonald's Corporation (NYSE:MCD) a cheap investment right now? The best stock pickers were taking a pessimistic view. The number of bullish hedge fund bets were trimmed by 3 lately. McDonald's Corporation (NYSE:MCD) was in 62 hedge funds' portfolios at the end of December. The all time high for this statistic is 84. Our calculations also showed that MCD isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 124 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let's take a look at the new hedge fund action regarding McDonald's Corporation (NYSE:MCD).

Do Hedge Funds Think MCD Is A Good Stock To Buy Now?

At Q4's end, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MCD over the last 22 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MCD A Good Stock To Buy?
Is MCD A Good Stock To Buy?

More specifically, D E Shaw was the largest shareholder of McDonald's Corporation (NYSE:MCD), with a stake worth $550 million reported as of the end of December. Trailing D E Shaw was Arrowstreet Capital, which amassed a stake valued at $457.4 million. Two Sigma Advisors, Citadel Investment Group, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Masterton Capital Management allocated the biggest weight to McDonald's Corporation (NYSE:MCD), around 3.02% of its 13F portfolio. Locust Wood Capital Advisers is also relatively very bullish on the stock, setting aside 2.14 percent of its 13F equity portfolio to MCD.

Seeing as McDonald's Corporation (NYSE:MCD) has experienced a decline in interest from the aggregate hedge fund industry, it's safe to say that there were a few fund managers who sold off their entire stakes last quarter. At the top of the heap, Gabriel Plotkin's Melvin Capital Management said goodbye to the largest stake of the "upper crust" of funds tracked by Insider Monkey, worth close to $296.3 million in stock. Steve Cohen's fund, Point72 Asset Management, also dropped its stock, about $21.9 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 3 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to McDonald's Corporation (NYSE:MCD). We will take a look at The Unilever Group (NYSE:UL), Danaher Corporation (NYSE:DHR), Medtronic plc (NYSE:MDT), SAP SE (NYSE:SAP), NextEra Energy, Inc. (NYSE:NEE), Texas Instruments Incorporated (NASDAQ:TXN), and Honeywell International Inc. (NYSE:HON). This group of stocks' market values match MCD's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UL,25,1172892,12 DHR,81,5378840,6 MDT,59,2814949,-3 SAP,14,1390775,-2 NEE,61,3078288,-3 TXN,56,2497473,1 HON,45,983560,4 Average,48.7,2473825,2.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.7 hedge funds with bullish positions and the average amount invested in these stocks was $2474 million. That figure was $2890 million in MCD's case. Danaher Corporation (NYSE:DHR) is the most popular stock in this table. On the other hand SAP SE (NYSE:SAP) is the least popular one with only 14 bullish hedge fund positions. McDonald's Corporation (NYSE:MCD) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MCD is 60. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 percentage points. Unfortunately MCD wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MCD were disappointed as the stock returned 10.7% since the end of December (through 4/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.

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