Throw This Stock Away

It's all about timing, isn't it?

I kicked off this weekly column in June, when I began recommending that investors toss out a particular stock. To help offset any outcry, I come back with three attractive stock candidates to take the trashed stock's place.

Given the market collapse in that time, most of my calls appear brilliant in retrospect. I can't pat myself on the back, though, since many of the buy recommendations have also tanked.

This week, I'm going to pick out a stock that appears to be on top of the world. At a time when many of your stocks may have tanked by 40% to 60% over the past year, this one has only shed just 7% of its value.

Who gets tossed out this week? Come on down, McDonald's (NYSE: MCD  ) .

You deserve a break today
It's easy to see why the golden-arched burger flipper has flourished in these horrendous times. Everyone loves a bargain meal, even if the signature Dollar Menu is just a trap to get you to spring for the $4 chicken breast salad or a $3 iced coffee.

The company's latest quarterly report was another winner:

  • Comps rose a hearty 7.1% worldwide, and a still enviable 4.7% domestically.
  • Earnings per share from continuing operations surged by 27%.
  • At a time when companies are slashing their dividends, McDonald's boosted its yield to what is now a respectable 3.8%.

So what's the problem? Glad you asked.

  • The company's bottom line has been boosted by favorable currency translations given the falling dollar. What do you think will happen there now that the buck is bouncing back?
  • Life may be good for McDonald's, but what about its franchisees? A weekend Wall Street Journal report details how some franchisees aren't willing to spend $100,000 to upgrade the company's beverage system. Even more troubling for those feeling that lattes will save the day, internal documents shown to the Journal indicate that coffee sales in several test markets peaked after the third week. In some cases, sharp declines have followed.
  • McDonald's and Burger King (NYSE: BKC  ) used to own the breakfast market, but now nearly every burger chain or premium coffee house is beefing up its morning business.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

  • Starbucks (Nasdaq: SBUX  ) : Yes, Starbucks. The java giant was the second stock I tossed in this column back in June, but things are different now. For starters, shares of Starbucks have fallen by 55% in that time. The company's push into smoothies and aromatically agreeable foodstuffs is a good one. Starbucks may take a decade to hit its all-time highs, but that should be enough to beat the market between now and then. Can you believe that Starbucks is now trading at just 11 times next year's projected earnings?
  • Chipotle Mexican Grill (NYSE: CMG  ) : Comps are still positive at the popular burrito joint that McDonald's once owned, though growth has slowed and margins have been roughed up lately. That's OK. It gives investors a chance to pick up the most dynamic quick-service chain in the country at less than 20 times next year's profits.  
  • Quality casual dining: This isn't a stock. It's a niche. Load up on the battered stars of casual dining, such as Cheesecake Factory (Nasdaq: CAKE  ) , P.F. Chang's (Nasdaq: PFCB  ) , and California Pizza Kitchen (Nasdaq: CPKI  ) . If the concepts had wait times to get seated on weekend evenings before the economy tanked, they will be the first to bounce back. This won't happen overnight, of course. That's not necessarily a bad thing, because it will give the industry time to shake out more of the weaker casual-dining players. By the time the rubble settles, the popular chains will be able to score great lease terms on vacant units and hit the market with fewer competitors nearby. This is only a suggestion for patient investors, since the downdraft may last for some time. 

Sorry, Ronald. It's time to Grimace. Besides, after launching its Monopoly promotion this month, how can I stand behind a company that's encouraging the random collecting of properties in this woeful real estate market?

Other headlines out of the weekly trash bin:

Do you like Rick's substitutions? Would you rather stick it out with the tossed company? Are there other stocks Rick should look at in future editions of this column? Let him have it in the comment box below.

Chipotle Mexican Grill is a Motley Fool Hidden Gems pick and a Motley Fool Rule Breakers selection. Starbucks is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor pick. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz doesn't like clowns. Sorry, Ronald. He does not own shares in any of the stocks in this story, save for Cheesecake Factory. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (3)

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.

  • Report this Comment On October 28, 2008, at 5:48 PM, rfsindg wrote:

    I own Mcd's stock, and I wouldn't trade a share for Starbucks (bet on bankruptcy). I sold Panera some time ago as they stumbled and changed how their sandwiches are made (prefab now). As for the rest of the secondary restaurants, why would you want to own them? In this market, McD's will continue to take share on price. Franchisees have been hoarding cash for the past 5 years. Time to spend some on coffee. Vice Chairman/CEO just bought $1,000,000 in stock on Fri.

  • Report this Comment On October 28, 2008, at 6:54 PM, trgeorge wrote:

    I definitely would not throw out McDonald's. And even more so if those are your alternatives, ESPECIALLY Starbucks. GROSS!

  • Report this Comment On October 29, 2008, at 6:23 PM, rd80 wrote:

    The FX exchange hits from a stronger dollar get partially offset by the lower commodity prices from the same stronger dollar. Even with FX headwinds, MCD has shown very impressive comparable sales in their overseas markets.

    SBUX??? Trades at a premium to MCD, no dividend, closing stores, premium product in a soft economy. Add in some of the same FX headwinds as MCD and I'm having a very tough time seeing how SBUX outperforms MCD over the next year or so.

    Disclosure -long MCD

  • Report this Comment On November 05, 2008, at 9:56 PM, wisconsin2001 wrote:

    I have owned MCD for more than 2 yrs now when it skitted to $41/sh. I have seen it keeps dividen increasing and going without trouble. Perhaps, I don't have stock analytical skill good as yours, but I see no reason to toss this investment.

  • Report this Comment On December 29, 2008, at 9:04 AM, twb311 wrote:

    Rick, it is true that overseas results will get hurt by currency translations. However you are incorrect about franchisees and their sentiment for Specialty Coffee. All eligible restaurants will be serving Specialty Coffee by mid-2009 with national advertising. Test market results have been encouraging, meeting or exceeding benchmark hurdles. Yes, more competitors are serving breakfast but with drinks like mochas, cappuccinos & lates at MCD to go with your Egg McMuffin or Sausage Biscuit, MCD is sure to capture more breakfast share. Consider the fact that MCD is up 3% YTD while SBUX is down 54%, and I will take MCD any day.

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