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Investors Don't Care for McDonald's Meat Mess; Dow Rebounds on Data

By John Divine - Jul 22, 2014 at 6:29PM

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McDonald's franchisee Arcos Dorados shares also fall, while Netflix doubles its profits but crumbles on high expectations.

All three major U.S. indices rose as strong housing growth and corporate earnings buoyed the stock market today. Existing home sales, after falling in the first three months of the year, logged a third consecutive month of increasing sales in June, demonstrating a welcome trend-reversal in 2014's second quarter. McDonald's ( MCD 2.59% ) stock dragged on the Dow Jones Industrial Average ( ^DJI 1.87% ) for a second straight day, but the blue chip index still managed to add 61 points ,or 0.4%, to end at 17,113.

McDonald's shareholders have seen better days, plain and simple. Not only did the stock lose 1.3% on Tuesday, but the longer-term growth strategy also now looks murky at best. The fast-food giant hasn't been a "growth stock" for decades, with its steady sales and solid dividend (it yields 3.2% today) appealing more conservative investors who wish to shy away from risk. But higher levels of risk may be returning to McDonald's stock, which is dealing with a food supply scandal in China; one of the company's largest suppliers is accused of selling McDonald's outdated and unsanitary meat. On top of that, the company's quarterly results today were unflattering, as same-store sales failed to budge and both revenues and earnings missed expectations.

The largest McDonald's franchisee in the world, Arcos Dorados Holdings ( ARCO 3.10% ), also suffers from these recent developments, as you might imagine. Shares of the Latin American operator fell 3.3% today, even though Arcos Dorados doesn't report earnings until next month and is presumably not involved in the meat fiasco half a world away. There could indeed be blowback upon Arcos Dorados from a PR perspective for the problems in China, and several key financials at the company have been moving the wrong way for the last three years, so I'm waiting on the situation to markedly improve before I put my money behind this franchisee.

Netflix boasts a variety of original and exclusive content to differentiate it from other streaming sites. Image Source: Netflix

Netflix ( NFLX 1.75% ) represents a much better growth opportunity for investors than anything having to do with the Golden Arches. Still, the premier name in online streaming video saw its shares tumble 4.6% on Tuesday. Although it grew its subscriber base by 1.69 million to over 50 million users in the second quarter, revenue, earnings, and projected third-quarter revenue and earnings also fell short of forecasts. While quarterly profits more than doubled from the same period last year, from a valuation perspective Netflix stock looks like it's priced for perfection from my point of view. With the stock trading at 62 times forward earnings, I may be a fan of House of Cards and Orange Is the New Black, but I'm not so head-over-heels with the company that I'm willing to give it $8.99 a month and a large chunk of my portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$35,227.03 (1.87%) $646.95
McDonald's Corporation Stock Quote
McDonald's Corporation
$255.79 (2.59%) $6.46
Netflix, Inc. Stock Quote
Netflix, Inc.
$612.69 (1.75%) $10.56
Arcos Dorados Holdings Inc. Stock Quote
Arcos Dorados Holdings Inc.
$5.33 (3.10%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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