Daily Gains Letter

This Company Appreciated Over Five-Fold the Last 10 Years—and It Probably Will Again

By for Daily Gains Letter | Feb 13, 2013

















DL_Feb_13_2013_MitchellWhen you think of Dow stocks, companies like The Procter & Gamble Company (NYSE/PG) and General Electric Company (NYSE/GE) come to mind. But you may not know that fast food giant McDonalds Corporation (NYSE/MCD) is a member of the Dow Jones Industrial Average. It’s fitting, in the sense that the index doesn’t have a lot of representation from the food-service industry, which is a big part of the Main Street economy.

McDonalds didn’t report the greatest earnings in 2012, and its global comparable store sales were down 1.9% in January; but this bellwether is seeing Wall Street earnings estimates increase significantly. On the stock market, McDonald’s has been down the last little while, but the company’s longer-term stock market performance remains stellar.

While the company recently reported that its global comparable store sales were down, the U.S. market produced growth due to increased menu items and strength in its value menus. It used to be that the most profitable part of a food-service franchise was the sale of soda, and that’s still likely the case today.

On the stock market, McDonald’s has been a pretty steady wealth creator, especially over the last 10 years. The company’s revenues and earnings growth have been consistent, and this is why I think a business like this is worth considering when it’s down in price on the stock market. It’s the kind of business in which an investor can build a position over time, and dividend reinvestment is available for those who are interested. The company’s stock chart is below:

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Chart courtesy of www.StockCharts.com

Some of the best-performing positions in the stock market lately are actually components of the Dow Jones Industrial Average. And while earnings growth has been modest, institutional investors have been paying up for earnings stability and dividends.

Virtually all of the corporate earnings reports I read for the most recent fourth quarter offered very conservative earnings outlooks this year. Corporations know that they have to keep expectations low so they can more easily beat them come earnings season. And knowing that real economic growth is difficult to generate, bold predictions are just going to scare investors away.

The stock market is now close to finishing its most recent upward leg that began last November. This is a market that needs a break; it’s running out of steam.

I would be very reticent to be a new buyer in this stock market, although I would accumulate good stocks if they come down in a correction. The fact remains that there are very few options available for investors other than the stock market because interest rates are so artificially low.

The big, blue chip companies that pay dividends are the way to go in an economy with such little real economic growth. So far this year, the stock market’s had a strong start, and that’s good. Valuations aren’t unreasonable, but we do require more revenues and earnings growth soon, or stocks could be considered expensive. It’s very interesting that McDonalds’ earnings estimates for 2013 and 2014 are going up. The stock retreated in the middle of last year, and looking back, it was worth buying.

History proves that the stock market’s best businesses are worth accumulating when they’re down. If history is any guide, the best stocks aren’t usually down for long.

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