It's unusual to hear someone in the financial media suggest
selling astock -- particularly one they previously recommended.
But knowing when to close a position at the right time is just as
important as getting into the right trade at the right time.
That's why I'd prefer not to leave this loose endopen .
If you stepped into a
position about ayear ago on my recommendation, I think it's time
to lock in your 40%gain and use those proceeds to invest in
A little more than a year ago, I concluded that "based on the
company's plausible growth forecast,shares could be worth
somewhere around $7 by the end of 2013 or mid-2014 -- about 60%
higher than current levels." The stock actually hit $7 in late
July and has since reached a high of $8.05.
But it's time to lock in the gain.
Don't misunderstand my intention. It's not a pessimisticjudgment
of the company, and yes, the stock could move higher. But with a
little more than a 60% gain to protect, any furtherupside
potential just doesn't justify the inherent pullback risk built
into a 12-month 60%rally .
Perhaps the biggest concern is the valuation. The stock's now
priced at a frothy 33.8 times trailingearnings . That's not
considerably more expensive than how Wendy's shares were valued a
year ago. But a year ago, valuation wasn't the concern.
Theturnaround effort was poised to be the driving force behind
the stock. The turnaround is a done deal, however, and with
earnings growth projected to slow to 13% in 2014, it's tough to
imagine themarket willing to pump up the premium beyond its
already lofty levels.
While Wendy's has been red-hot this year, McDonald's has been
less than impressive. Shares are up for the year, but down 8%
from April's peak and still falling at a decent clip.
The recent news hasn't been particularly encouraging, either.
The world's largest fast-food chain has missed earnings estimates
in four of its past fivequarters . To make matters worse, Subway
recently announced it was aiming to open as many as 1,000 to
restaurants in Europe next year, where McDonald's is already
Given that, why would an investor want to jump into an
apparentlaggard ? For the same reason that now's the time to shed
Wendy's -- nothing lasts forever. Bothstocks can (and have)
stopped and turned on a dime, and McDonald's is due for a rebound
for a handful of reasons.
||McDonald's is making a push to keep as many units as
possible open 24/7, and to serve breakfast after midnight.
One reason is simply that traders have unduly punished the
stock. Earnings misses or not, the restaurateur is still on pace
to boost earnings 4.4% this year and projected to increase
thebottom line 8.6% next year. That's in line with the growth
rate the company has logged for years now. Point being, despite
recent criticisms driven by unmet expectations, the company is
still doing fine.
Another reason McDonald's shares are poised to start climbing
again is the company's new push to keep as many units as possible
open 24/7, and to serve breakfast after midnight. Investors
weren't particularly impressed when the plan was unveiled. But
hungry consumers have responded favorably to the new hours of
service and expanded menu. Less than half of McDonald's 33,000
restaurants are open around the clock, but that figure should
reach about 60% by 2016.
Finally -- though perhaps a little unfairly -- the company is
really starting to take advantage of its franchise model by
leveraging the clout of its name in a couple of ways.
Much like Wendy's, McDonald's is looking to get out of the
company-owned restaurant business by converting as many locations
as possible to franchises. Though doing so lowersrevenue ,
franchise fees are much higher-margin revenue. As part of those
deals, the company usually keeps the underlying rights to thereal
estate , and carries that property at cost on the books.
Translation: McDonald'swill effectively own a bunch ofundervalued
But at the same time, McDonald's move is ruffled some
franchisees' feathers. McDonald's franchise fees have increased
to a hefty average of 12% of storesales . That equates to an
average of $300,000 per year being forked over from franchisees
to thecorporation , up from $212,000 (8.5% of sales) just five
years ago. Franchisees are grumbling, but they have little choice
in the matter.
Putting it all together, McDonald's has more going for it now
than the market's giving itcredit for.
Risks to consider:
Though unlikely to actually change the status quo, the recent
movement to increaseminimum wage rates at fast-food restaurants
will cast at least a modest shadow of doubt on the company's
Action to take -->
It's admittedly tough to jump off what seems like a rocket stock,
but veteran investors know nothing lasts forever. Wendy's is a
fine company, and the stock should do well in the future. But for
the time being, shares are overbought and ripe for a pullback.
It's better to be out too early than too late. On the flip side,
McDonald's have been suppressed for a little too long and are due
for better days.
The only consideration to make before booting Wendy's is just how
close this idea is to incurring a long-termtaxable gain as
opposed to a short-term taxable gain. The original suggestion was
made on Aug. 16, 2012, so you've been in for nearly a year. It
may be worth holding a tad longer if you're on the
short-term/long-term taxable gain bubble.