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
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.
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.
(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.