Will McDonald’s Trigger the Next Bear Market?

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club
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Can a cheeseburger predict the bull market's death?

Some people seem to think so... even one of the most famous permabears.

Me, I'm a little more skeptical.

I’ll explain.

A few months ago, noted bear and editor of The Gloom, Boom & Doom Report Marc Faber said he believed the first thread was unraveling on the bull market due to weaker sales at McDonald's (NYSE: MCD).

At the beginning of September, McDonald's announced global same-stores sales fell 3.7%... the biggest drop in a decade.

"If McDonald's doesn't increase its sales," Faber told CNBC, "it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income in terms of purchasing power..."

That's a pretty bold leap to make.

But as the market charged higher, the picture got gloomier for McDonald’s. In October, same-store sales fell 0.5%. Then in November, they were down 2.2%, with U.S. sales down 4.6%.

A French fry shortage in Venezuela only made matters worse, followed by product safety concerns in Japan that forced the company to suspend Chicken McNugget sales. That McNugget fiasco caused McDonald’s same-store sales in Japan to fall 21% in December.

So, sure, the past four months haven’t been great for the company. But when somebody predicts that the market is going to experience a 20% to 30% decline and enter a bear market because sales at the world's largest burger chain slipped, I have to call bunk.

The core of Faber’s argument is that if sales weaken at the Golden Arches, that means consumers have no money... thus, the world is on the brink.

Now, you could believe that... OR...

You could look at the fast food industry and see that McDonald's is trying to keep its head above water in one of the most competitive environments it's ever faced...

That there's a "Golden Age" underway for an industry that has largely struggled to change... That the fast food industry itself is experiencing tremendous growth... And that consumers are actually willing to pay more money at places other than McDonald's.

Death by a Thousand Cuts

Let's just make a quick list: We have McDonald's, Burger King and Wendy's (Nasdaq: WEN). Those are the "Big Three" national burger chains and have been for decades.

McDonald's has proven it can fend them off. But let's keep going...

Let's throw on the grill Burgerfi, Five Guys, Cheeburger Cheeburger, In-N-Out, Smashburger, The Burger Joint, Shake Shack (soon to IPO), Checkers, Fatburger, Red Robin (Nasdaq: RRGB), Sonic (Nasdaq: SONC), Jack in the Box (Nasdaq: JACK), Culver's, Whataburger, Johnny Rocket's, Carl's Jr. and Hardees...

I can't ever remember there being such a wide range of options for burgers.

People are always going to have concerns over the economy and consumer spending. I like to look at the consumer discretionary sector for signals, just like Faber does. The difference is: I don't see concern. I see something else happening.

It's not like Americans aren't spending money on fast food. In fact, the exact opposite is taking place.

In 1970, Americans spent $6 billion on fast food.

By 2000, that total had grown to $110 billion.

By 2012, it was more than $160 billion.

That's a 45% increase over a dozen years! And an increase of 2,556.67% from 1970 to 2012!

Around 80% of Americans eat fast food once per month. About half of Americans eat fast food once per week.

So, these upstart burger chains are experiencing rapid growth.

They've discovered a Golden Age in which consumers are willing to pay top dollar for better quality products.

Let's take Five Guys, for instance. It was just a local chain in my area for 15 years. The company operated six locations from its first location in 1986 to 2001.

Then, it exploded. Today, there are more than 1,000 Five Guys restaurants in 48 states, with another 1,500 under construction.

Smashburger first opened in 2007. Eight years later, it already has 268 locations.

Burgerfi is only 4 years old, but it increased its number of stores by 175% in 2013 and will more than double again in 2014. At the same time, per unit sales at Burgerfi locations increased 25.6% in 2013 to $1.9 million.

Now, McDonald's has more than 14,000 locations. Per unit sales in 2013 were $2.5 million. So, McDonald's is considerably larger than its competitors.

But you also have to remember the majority of McDonald's revenue comes from Europe (its biggest market), Asia Pacific and Africa. In the U.S., revenue increased 11.5% from 2009 to 2013. But in Europe it grew 21.9% while revenue in the Asia Pacific exploded, increasing 49.31%.

When it sees double-digit same-store sales declines in Asia, that’s trouble. It's akin to Yum Brands (NYSE: YUM) struggling the last couple of years because avian flu concerns demolished KFC sales in Asia.

More importantly, while McDonald's has struggled, Burgerfi, Smashburger and Five Guys are taking off, and other fast food places like Chipotle (NYSE: CMG) and Panera (Nasdaq: PNRA) are booming.

Let’s take a handful of restaurant stocks and compare them to Yum Brands and McDonald’s over the last two years...

It’s not even close.

And you see that spike upward in January of this year? That was when same-stores sales for December came out. All those stocks set new 52-week and all-time highs.

I do have several restaurant indexes that I created and follow. Last year, for my Burger Joint Index, the average gain was over 20%, led by Jack-in-the-Box and Sonic. Over the past year, McDonald’s return is negative, making it the worst performer in the Burger Joint Index.

Among the millennial generation, the largest and most financially powerful generation, Chipotle is the No. 1 fast food restaurant... Panera is No. 2... Subway is No. 3.

So, McDonald's was able to maintain dominance over Burger King and Wendy's for decades and declare a victory in the great Burger Wars of the 1980s and '90s.

But now there are too many options. Too many fronts to fight.

McDonald’s is forced to regroup, cutting items from its menu and trying to reenergize its brand.

So, you’re welcome to panic that sales at McDonald's continue to fall and think that's the sign of the apocalypse.

Or you can realize that money is still being spent, just elsewhere, and at much higher prices.

Good investing,

Matthew

P.S. As you probably gathered from today’s article, I’m really into market patterns. In fact, they’re a major piece of my overall investing strategy. I’ve spent years determining which stocks are likely to prosper during certain periods. But recently, I stumbled upon something bigger than anything I’ve ever encountered. It’s a way to capture single-day bursts of 181% or more - enough to start a trading session with $5,000 and end up with $14,030. If you’re interested, I’ve laid out all the details in a short presentation here.

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A Spicy Treat for You And Your Portfolio

If today’s featured article left you craving fried food and frosty beverages, we’ve got the perfect treat for you: Buffalo Wild Wings (Nasdaq: BWLD).

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In fact, the stock has more than quadrupled since January 2010 - and it’s showing no signs of slowing. During its most recent earnings report, the company said it expects an 18% profit increase in 2015. This just after revealing weekly store sales are about $53,000 per location, a 7.3% increase from the previous quarter.

Of course, with the Super Bowl approaching, the biggest profits could be right around the corner. As Matt pointed out in his initial recommendation, “Wings and football go hand-in-hand...”

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