Market volatility is inevitable. Stocks move, and every so often there's a flight to quality. When equity markets get rocky there's a natural inclination to shift one's portfolio into brand names that can stand the test of time.
Let's take a look at Disney (NYSE:DIS), McDonald's (NYSE:MCD), and Wal-Mart (NYSE:WMT). The three companies are routinely among the lists of top big brands, but they are also potentially big winners for today's opportunistic investor.
The financial headlines when it comes to the House of Mouse tend to center around the struggles at ESPN. Millennials and older penny pinchers are cutting the cord, kissing their fat cable bills goodbye. Outside of premium movie channels, ESPN is the priciest component of the programming bundles offered by cable and satellite television providers.
Disney's media networks division is big, including ABC, Disney Channel, and ESPN. It's the largest slice of the revenue-mix pie, and an even larger contributor when it comes to operating profit. However, Disney is making more with less. Media networks keeps growing at Disney, and the same can be said for its world-leading theme parks and a movie division that is dominating the box office for the third year in a row.
There was a time when the Golden Arches were starting to get rusty, but its prospects have been rosy since the introduction of all-day breakfast in late 2015 put an end to a two-year funk. Investors have been hot for McDonald's, too. The stock hit new all-time highs earlier this month, unlike Disney that's still trading 12% below the all-time high it set two summers ago.
Wall Street sees the good times continuing. Last week it was Baird and Credit Suisse jacking up their price targets to $164 and $165, respectively. This morning it was Gregory Francfort at BofA/Merrill increasing his price goal from $165 to $175. Francfort sees McDonald's as one of the few restaurant brands that can increase franchisee economics through lower price points.
These aren't the best of times for the restaurant industry. Labor and occupancy costs are inching higher at a time when food costs have been stable, creating a wider value disparity between going out or eating at home. Thankfully for McDonald's the vast majority of its locations are franchisee-owned, so they're the ones fretting about the call for higher wages and escalating operating costs.
The world's largest retailer by sales volume has unique advantages, making it one of the few retailers that can compete with the Amazon.com (NASDAQ:AMZN) juggernaut. Walmart stores use shrewd technology and economies of scale to keep prices low and inventory turning, passing on the savings to its shoppers through "roll-back pricing" and other aggressive price-whittling moves.
Amazon may have surpassed Wal-Mart when it comes to market cap two years ago, but Wal-Mart generates more than three times the revenue as the dot-com darling. Wal-Mart isn't asleep at the internet wheel, acquiring Jet.com last year to become more competitive online. Amazon may be gaining, but it has been mostly at the expense of pricier Walmart rivals.
Battle of the brands
Disney, McDonald's, and Wal-Mart have big names that aren't going anywhere, and investors are being rewarded for their patience. Disney, McDonald's, and Wal-Mart stocks yield 1.5%, 2.5%, and 2.6%, respectively.
The stocks may not seem cheap, trading between 16 and 22 times next year's profit targets. However, these are relative bargains compared to some of the lesser rivals that the market has bid up lately. Disney, McDonald's, and Wal-Mart deserve market premiums for their superior brands, and that makes them bargains even at today's elevated price levels.