A perfectly iconographic example of the exaggerated avarice of American capitalism both celebrated and demonized in pop culture mediums, McDonald’s has a knack for finding itself in the center of innumerous headlines and controversies. With a current market capitalization of over 87 billion dollars, and physical assets with a book value in excess of 25 billion, the fast food giant will continue to leverage its massive resources and maintain its generally favorable brand image. Yet recent poor earnings reports suggest a shift in consumer sentiment, which ultimately threatens the speculative interest that supports a company’s public valuation. While no one is portending McDonald’s demise, its ability to fly over troubled skies is in danger.
Fundamentally, consumer tastes within the fast-food industry has been changing over the past several years as marketing departments amongst McDonald’s competitors have been trumpeting health-conscious menus. This presents a significant challenge to the company, which caters to the high-fat, high-calorie clientele. Offering “green-eating” makes as much sense as serving virgin cocktails at a Hell’s Angels rally. As Douglas McIntyre writes for 24/7 Wall Street, “To give a sense of how unhealthy some menu items are, McDonald’s continues to sell coffee drinks with more than 300 calories. One of its mocha coffees has 320. The chocolate version of the coffee has 350. Adding a sausage and hotcake package plate at 520 calories, and breakfast calories reach nearly 1,000” (McIntyre, Douglas A. “McDonald’s Still King of High-Calorie, High-Fat Food“. 24/7 Wall Street. January 24, 2015. Web.). An important disclaimer is that supposedly healthy eateries are really not much better than McDonald’s in terms of caloric intake, but their marketing message has created a successful delineation away from the stereotypical image of the fast-food industry. McDonald’s as the greatest contributor to said image will find it virtually impossible to reverse this perception in an appreciable time frame.
Technically, few analysts have emphasized the highly correlated trading behavior between McDonald’s stock and the S&P 500 index. Mathematically speaking, the two indicators have a correlation coefficient of 65-percent between October 1st, 2014 and January 23rd, 2015, a statistically strong relationship. The actual percentage difference between McDonald’s market performance versus the S&P 500 is very minute, mostly inside plus/minus one-percent (±1%) of each other. However, this difference in recent weeks, though still tight, is showing evidence of fracture and entropy.
This is problematic for a number of reasons. First, the broader equities market itself is exhibiting sporadic behavior, indicative of hedge fund managers and other large players initiating protective positions and leaving bullish speculators vulnerable to volatility swings. I write in greater detail regarding this matter in a recently posted FutureMoneyTrends.com article. Because 65.3-percent of outstanding shares are held by institutional funds according to Thomson Reuters, volatility in the S&P index will more than likely translate into volatility for McDonald’s stock.
Secondly, due to the strong influence of institutional trading, the bulk of McDonald’s key investors may either be exiting their positions or taking bearish bets against the company in case there is a downturn in its key demographic or the underlying economy. In either case, the circumstances do not provide much confidence for a potential revival in McDonald’s stock. The failure to build momentum with the rest of the S&P 500 in recent weeks reveals a clear dichotomy in which the financial health of the consumer is far more relevant than the menu items on offer.