McDonald’s Could Sell Off in Coming Weeks

Dow component McDonald’s Corp. (MCD) has failed to capitalize on July’s impressive Q2 2021 earnings report, gapping down from an all-time high and failing a modest breakout above May resistance in the 230s. It’s now added just seven points since ending a COVID-fueled advance in October 2020 and has booked a mediocre 7% return since August 2019. Accumulation hasn’t budged during this period, exposing the fast food giant to a major correction.

Weak Two-Year Growth

The company beat top and bottom estimates in the last quarter, posting a profit of $2.37 per-share on a 56.5% year-over-year revenue increase to $5.89 billion. Even so, two-year growth rates exposed the deep impact of social distancing and lockdowns, with U.S. sales rising 14.9% while International Operated Markets gained just 2.6%. International Development Licensed Markets brought up the rear, gaining a paltry 0.3%. In addition, just 70% of U.S. dining rooms were open at the time of the July release.

Despite headwinds, Guggenheim analyst Gregory Francfort recently named the fast food giant as a ‘top pick’, citing long-term benefits gained through extensive investments in restaurant remodeling and digital offerings. As he notes, “McDonald’s is the largest quick service operator in the U.S. and the world with $110bn in global system sales projected (by us) this year. Roughly $1 out of every $20 in the U.S. that is spent on food away from home (not at a grocery store) is spent at a McDonald’s.”

Wall Street and Technical Outlook

Wall Street consensus has been glued to an ‘Overweight’ rating so far in 2021, now based upon 24 ‘Buy’, 3 ‘Overweight’, and 8 ‘Hold’ recommendations. No analysts are telling clients to underweight positions or move to the sidelines. Price targets currently range from a low of $232 to a Street-high $295 while the stock is set to open Monday’s session just $6 above the low target. This humble placement highlights persistent investor anxiety about the Delta variant’s long-term impact.

McDonald’s topped out above 220 in 2019 following a strong uptrend and sold off to a three-year low during 2020’s pandemic decline. It returned to the prior peak in September and broke out but the rally failed, yielding a decline into the first quarter of 2021. More positive action mounted resistance at 238 in July, but this uptick also failed, generating the 9^th test at 50-day moving average support since May.  Long-term Stochastics have now rolled into sell cycles, raising odds for a selloff into the 220s.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.