Directionless Dow Drifts Higher; Why Are McDonald's and J.C. Penney Soaring?

The Dow didn't move strongly in either direction this morning, but struggling restaurant chain McDonald's and retailer J.C. Penney moved sharply higher. Find out why.

Mar 11, 2014 at 11:00AM

Early Tuesday, the Dow Jones Industrials (DJINDICES:^DJI) traded in a directionless manner, opening higher, falling to modest losses, and then regaining that ground to rise 30 points as of 11 a.m. EDT. Yet amid the calm in the broader stock market, surprising gains from struggling companies McDonald's (NYSE:MCD) and J.C. Penney (NYSE:JCP) are making many investors wonder whether the bull market has run so far that shareholders are becoming irrational in their expectations for the stocks and the market as a whole.

McDonald's jumped more than 3% this morning even after releasing its latest ugly monthly sales figures yesterday morning. With worldwide comps down 0.3% and same-store sales at U.S. locations down 1.4%, McDonald's has continued to see the steady erosion of its once-powerful growth. Although weather undoubtedly played a key role in the sluggishness in the company's U.S. performance, an even bigger drop of 2.6% in its Asia/Pacific, Middle East, and Africa segment doesn't bode well for the company's prospects. Yet today's big gain suggests that longer-term investors believe the restaurant chain has the capacity to rebound from here, and with a strong dividend yield, those who believe that McDonald's can recover and are willing to ride out volatility along the way will at least get rewarded with quarterly income while they wait.

This morning's 9% rise for J.C. Penney comes from the latest round in the battle between those who think that the struggling retailer is doomed and those who think it could become the biggest turnaround story in American retail. This morning, Citigroup joined the bullish side, upgrading the stock and calling it an "American comeback story" with the potential to deliver much better results for the foreseeable future. Yet what the analysts don't highlight as much is the fact that positive same-store sales should be a foregone conclusion given the terrible performance from J.C. Penney in 2013. If results don't get better, then it'd be almost certain that some of the concerns investors have about J.C. Penney having enough cash to keep operating could blossom into a full-blown liquidity crunch. For today, though, investors are willing to bet on what seems like an increasingly improbable turnaround.

As the bull market rages on, it's important to keep perspective on the fact that not every stock deserves to climb. In situations like this, it pays to be cautious and wait for companies to deliver on their potential rather than treating it as a given that they'll succeed.

One reason why McDonald's looks good to many
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

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