(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)
McDonald's Corp. (MCD) shares have come under heavy selling pressure in recent weeks, falling by roughly 17 percent since Jan. 26, while the broader S&P 500 Index has dropped by 7.25 percent. Before market close on March 2, the stock was on pace to record its worst one-day dollar decline in history and its worst percentage fall since 2008, according to a MarketWatch report.
But a recent analysis of McDonald's technical charts suggests shares could fall further, pushing the fast-food giant well into bear market territory to around $135. That would be a drop of over 24 percent from the stock's 52-week high of $178.70. Shares are also expensive on a historical p/e ratio as well, and should they return to a historical norm, they could fall to $120, a decline of nearly 33 percent.
McDonald's took a hit on March 2, after RBC slashed its price target on the stock to $170 from $190, noting a combination of deteriorating industry conditions, along with a disappointing start to the new value menu.
From Nov. 8, 2016 through Jan. 26, 2018, McDonald's shares rose by 56.3 percent, more than Facebook Inc. (FB), Alphabet Inc. (GOOGL), and Microsoft Corp. (MSFT). It wasn't just the stock price that soared; the company's valuation also spiked, putting its price-to-earnings multiple nearly on par with the technology giants. (See also: Why McDonald's Oversold Stock Still Looks Expensive.)
The technical chart shows the stock price has broken multiple support levels and appears set to fall to $135, refilling a gap that was created in April 2017. Should the stock refill the gap, it would push shares down roughly 24.5 percent from the highs seen on Jan. 26, and well into bear market territory.
McDonald's is currently trading at 23 times its trailing 12-month earnings, well above its historical norm of 16 to 18 times. Should McDonald's stock return to its historical range, shares could fall to nearly $120, a decline of almost 33 percent from its 52-week high.
The biggest problem with McDonald's from a fundamental standpoint continues to be its declining revenue and an earnings multiple that still trades at near technology-like valuation. Analysts currently don't expect McDonald's to see any meaningful revenue growth through 2020. Companies like Facebook, Microsoft, and Alphabet are expected to see revenues surge, but until recently, you were paying nearly the same valuation for the companies.
McDonald's shares are finally beginning to look expensive to investors, and that means they're likely not finished falling.
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.