Is McDonald's the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if McDonald's (NYSE: MCD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at McDonald's.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 4.3% Fail
  1-year revenue growth > 12% 5.6% Fail
Margins Gross margin > 35% 39.9% Pass
  Net margin > 15% 20.6% Pass
Balance sheet Debt to equity < 50% 83.4% Fail
  Current ratio > 1.3 0.90 Fail
Opportunities Return on equity > 15% 35.5% Pass
Valuation Normalized P/E < 20 19.85 Pass
Dividends Current yield > 2% 3% Pass
  5-year dividend growth > 10% 28.2% Pass
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With six points, McDonald's serves up a pretty tasty stock. The company has dodged most of the economic recession with its combination of growth and appeal for cash-strapped consumers.

McDonald's shareholders have had almost an unbroken line of strong results in recent years. The stock beat out the bear market of 2008, rising almost 9% in a year in which the S&P 500 fell 37%. Yet that hasn't stopped the stock from posting impressive share price growth during the recovery.

The secret comes from McDonald's aggressive strategic moves and tenacious customer demand. On one hand, the company pushed into Starbucks' (Nasdaq: SBUX  ) market with its McCafe line of beverages. On the other, McDonald's has seen strong same-store sales not just in emerging markets but also in its home U.S. territory -- something that many companies, including Yum! Brands (NYSE: YUM  ) , haven't been able to count on.

What makes McDonald's success all the more impressive is that it's doing well in a tough period for many restaurant chains. The company increased menu prices earlier this year in response to higher costs, just as Darden (NYSE: DRI  ) and Red Robin Gourmet Burgers (Nasdaq: RRGB  ) have had to do lately.

In short, if the company can raise dividends and stay reasonably priced in such a horrible environment, it could get even better when things get back to normal for the economy. McDonald's falls short of perfection, but that doesn't mean you should ignore it as a prospect for your portfolio.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add McDonald's to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Red Robin, Yum!, and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and McDonald's as well as writing a covered strangle position on Red Robin. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1510007, ~/Articles/ArticleHandler.aspx, 12/18/2014 7:04:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement