The Big Money Says to Buy McDonald's

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: McDonald's (NYSE: MCD  ) . Are institutions bullish or bearish when it comes to this fast-food phenom?

Foolish facts

Metric

McDonald's

CAPS stars (5 max) ****
Total ratings 4,947
Percent bulls 94.5%
Percent bears 5.5%
Bullish pitches 800 out of 862
Highest rated peers Kona Grill, Country Style Cooking (Nasdaq: CCSC  ) , Dreams, Inc.

Data current as of Nov. 27.

Among the Earth's population, only third-worlders don't know McDonald's, and even that's changing. Mickey D's now derives 19% of annual revenue from sales in the Asia Pacific, Middle East, and Africa region. Fools like its relative omnipresence.

"I don't like it, but I eat there sometimes. If another place were at EVERY rest stop on the highway that was as quick and recognizable, I would want its stock, too. As long as there are [truck] drivers and ghettos, there will be McDonald's," wrote All-Star investor Bobbybanana40 in August. The stock is up more than 11% since.

Other Fools like Mickey D's for its generous 3.1% dividend. No surprises there. Known as a "Dividend Aristocrat" for its long-standing record of paying dividends, management has increased its payout by an average of 27% annually over the past five years.

As an investor, I can appreciate the cushion those dividends provide. There are always bad times in investing. With McDonald's, a disappointing same-store sales report out of France proved a drag on overall results this summer.

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Capital Research and Management

46,885,000

58,840,296

67,621,300

86,874,278

BlackRock

17,369,036

11,827,638

62,664,639

53,179,154

Fidelity Investments

50,906,275

53,314,826

36,171,846

44,158,909

The Vanguard Group

35,722,689

36,988,911

39,181,683

42,580,990

State Street Global Advisors

43,898,228

49,498,545

44,866,847

42,378,463

TOP 25 TOTAL

382,872,256

384,671,895

412,882,628

435,568,787

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

And yet you won't find Big Money investors complaining. If anything, they're more bullish on McDonald's today than they were before the recession.

Growth may help to explain why. New menu items (e.g., the return of the McRib) and an increasing appetite for its offerings in emerging markets has convinced Wall Street that the company will grow earnings by more than 10% annually over the next five years.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Country Style Cooking 5.44% 51.63%
Domino's Pizza (NYSE: DPZ  ) 69.19% 2.45%
McDonald's 71.58% 0.09%
Tim Horton's (NYSE: THI  ) 71.86% 0.49%
Wendy's/Arby's Group (NYSE: WEN  ) 52.40% 2.31%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 27.

Here's where the story gets both interesting -- and depressing. McDonald's ownership profile is neither bad nor good; it's just vastly inferior to peers.

Among the domestic chains, Wendy's/Arby's is just 52% owned by institutions. They could easily buy more and push the stock higher. And with insiders still owning more than 2% of the business, they've got ample financial incentive to either implement a turnaround, or broker a sale to a suitor.

Among international peers, China's fast-growing Country Style Cooking is proving that locals appreciate a good quick-serve option. Institutions own less than 6% of the outstanding shares. Once they start buying -- and I believe they will -- the stock should take off.

I'd be willing to buy either stock before buying McDonald's. But that doesn't mean Mickey D's is a bad stock or a bad buy. A mixture of dividend and international growth should create returns over time, though they may come at a slower pace than some investors would like.

Now it's your turn to weigh in. Do you like McDonald's at current prices? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on McDonald's? Add it to your watchlist by clicking here.

BlackRock is a Motley Fool Inside Value pick. Country Style Cooking is a Motley Fool Rule Breakers recommendation. Tim Horton's is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 Motley Fool owns shares of Domino's Pizza and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (1) | 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 November 30, 2010, at 10:32 PM, rd80 wrote:

    I think market cap needs to be taken into consideration somehow when comparing insider ownership. On a dollar value basis, MCD insiders own about $800 million worth of stock - far more than the other companies listed. Of course, I also expect MCD has more insiders. Maybe something like $ value of insider shares per $ million of insider compensation would be a better metric.

    Shareholders will be happy campers if WEN can get the business cranking. That's going to be a tough order in a weak economy with competition like YUM and MCD performing well and busily putting up restaurants around the globe.

    Don't know CCSC well enough to comment on it.

    I'm with the big money on this one. MCD is a fair value here and I'm a big fan of growing dividends. I'd like to buy lower, but no clue if/when it might take a fall.

    Long MCD.

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