When interpreting the tea leaves of the economy and the
market, economists, money managers, analysts and most
garden-variety market pundits consult the same set of widely used
The S&P/Case-Shiller home price indices. Various
purchasing managers' indices. An array of employment reports.
All of these are good, tangible indicators about the health of
the overall economy and the direction of the markets.
However, I've found a widely held stock that indicates the
health of many different indicators -- from commodity costs to
wage inflation -- and often foreshadows how the broader equity
markets will behave.
I look to the Golden Arches.
What the stock tells me is much more than how many burgers and
fries Mickey D's has sold.
Including revenue from franchised outlets,
boasts annual sales in excess of $30 billion, which would make
the company the world's 68th-largest economy (just ahead of
Ecuador). Let's look at the two most important components of
McDonald's business and enable it to serve 1% of the Earth's
population every single day: materials and labor.
In terms of materials, McDonald's uses 1 billion pounds of
beef a year -- in the U.S. alone. That's equal to 5.5 million
head of cattle. As commodity prices rise and fall, the company's
input costs will shift and based on the size and scale of its
consumption, those shifts will always play a major part in the
performance of the business and the stock.
In terms of labor, McDonald's hires around 1 million workers
in the U.S. every year. Based on company estimates, 1 in every 8
workers in America has been employed by the company at some
Factor in other important elements -- such as the company's
use of paper products, transportation, real estate, store
remodeling, even injection-molded plastic (McDonald's is one of
the world's largest toy sellers, accounting for 20%, $6
billion-plus, of all annual sales) -- and it becomes clear that
the stock is a pretty good economic and market indicator.
Here's a chart of MCD's performance over the past five years,
along with that of the S&P 500 Index:
Obviously, investors who held MCD shares clobbered those who
drank the indexing Kool-Aid over the past six years.
More importantly, look at the trend: Just a few months before
a broader market pullback, MCD experienced its own pullback.
Each time the stock was weak, the culprit was rising input
costs (inflation), which led to menu price hikes, labor concerns
or softer sales (which in turn signaled weakening consumer
spending) -- all clear economic indicators.
Now what was the average S&P pullback post MCD pullback?
Around 8%. Hmm.
So what is McDonald's telling us about the economy and the
The same thing it always has: Inflation is creeping into the
picture... which will make for a weak market once it's fully
Currently, MCD is off about 2% from its recent high near $103.
While McDonald's is a great stock to own for the long haul --
preferably on a pullback well below $100 a share -- in an
environment where rising inflation and valuation sensitivity
could be factors, there is a handful of names that I would rather
hold -- like these three blue chips:
: The nation's leading wireless provider is busy expanding its
reach with its announced acquisition of satellite content
. Telecom has evolved from a lumbering, infrastructure-heavy
utility with low growth and margins into a lean business with
high margins and steady growth -- and AT&T is one of the best
out there. Shares trade at around $35.50 with a cheap forward
price-to-earnings (P/E) of 13.4 and an inflation-fighting
dividend yield of 5.2%.
Cisco Systems (Nasdaq:
- As a companion piece to AT&T's "railroad," Cisco is busy
supplying the rails, ties and switches that help connect the
Internet of Things. With well over half of the world's market
share in routers and switching and 10 year average earnings per
share growth of 12%, this
is a bargain near $25 with a forward P/E of 12.2 and a rising
dividend yield of 3.1%. Again, technology isn't necessarily
inflation-proof, but it does hold up better than some
Alliance Bernstein Holdings (NYSE:
: The master limited partnership (
) units of this asset manager have always been a go-to name for
me when looking for portfolio income and growth. With a solid,
research-driven money management franchise, earnings per share (
) are expected to grow 11% this year. With a price near $26, AB's
dividend currently represents a 6.1% yield.
Risks to consider:
While there is strong anecdotal evidence for this "McDonald's
indicator," all factors regarding equity market behavior and
influences should be examined and weighed before making any
decisions on portfolio adjustment. Also, all three names
discussed carry their own economic risk baggage within their
Action to Take -->
Clearly, the pre-market correction pattern of MCD shares is
interesting. With this in mind, it's probably a good idea to at
least review your portfolio and consider managing risk where
applicable. T, CSCO and AB have an average forward P/E of 13.5
and average dividend yield around 5%. The low valuation and
higher yields will provide some protection from market volatility
caused by rising inflation. Should inflation prove not be a
problem, this group of stocks could have a total return upside of
close to 30%, assuming a modest expansion of the forward P/E to
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