McDonald's Options Traders Bet Stock Will Fall 7%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

McDonald's stock has already fallen by 8% from its January highs, and some options traders are betting the stock drops by another 7%. The company reports third-quarter results on October 23 and estimates are calling for robust earnings growth on declining sales. 

Directionally, technical analysis also suggests the stock may fall following quarterly results. 

MCD data by YCharts

Bearish Option Bets

The options expiring on December 21 at the $160 strike price heavily favor the stock falling, with the number of puts outweighing the calls by a ratio of 9 to 1. The puts at the $155 strike price have 5,000 open contracts. For a buyer of those options to earn a profit the stock would need to fall to $152.50.

Bearish Technicals 

The chart shows that the stock has been trending lower since peaking in January. It attempted to break out in early October but failed. Now it is below technical support at $165. The next level of technical support does not come until $155.50 which is 5% lower than the current stock price of $164. (See: McDonald's Stock Could Break Down in Coming Weeks.)

The relative strength index has been trending lower since May of 2017 despite the stock's ascent to record highs, which is a bearish divergence. It suggests that momentum continues to leave the stock. 

Slowing Growth

Analysts estimate that McDonald's earnings will rise 13% to $2.00 per share in the third quarter. But revenue, on the other hand, is forecast to fall by 8% to $5.3 billion.

MCD Annual EPS Estimates data by YCharts

The longterm story is more of a challenge. Earnings growth in 2019 is expected to decelerate to 7%, half of this year's growth. Analysts see revenue falling next year after an 8% decline this fiscal year.

The stock is hardly cheap, trading at a 2019 PE ratio of 20. An investor is paying nearly three times the company's 2019 expected growth rate. Since 2015, the stock has traded with a one-year forward PE ratio in a range of 15 to 25. Given McDonald's rich premium and weak fundamentals, a continued decline in the stock is more likely than a sustained advance.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.