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

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

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

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.

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