Let’s face it; there are some basket-case stocks which can deliver high returns yet they can also collapse quickly causing loss to investors.
Based on this, analysts have stated that investors should rather invest in quality companies which are currently experiencing temporary setbacks.
According to Thomas “TJ” McConville, a manager at Becker Value Equity Fund, their goal is to pinpoint companies that are stable yet which are working on improving the fundamentals of their business. It is those stocks which have ‘fallen out of favor’ that investors should consider.
In order to pinpoint these types of stocks, analysts look at a variety of standard valuation metrics such as enterprise values to sales and price to earnings. Added to this, companies are also valued on an absolute basis which means that sum of parts analysis, trading range and a discounted cash flow analysis are used. Added to this, a company is also assessed on the consistency of cash flows, EVA spread, balance sheet strength and returns on capital. A realistic path of recovery is then assessed.
With these metrics in mind, one of the companies that McConville thinks investors should consider is McDonald’s Corporation (MCD, +0.59%).
Over the last few months, we have seen a decline in U.S. sales at McDonald’s and this number seems to continue to fall. Most of the fast food giant’s revenue, 65 percent in fact, comes from Asia and Europe while the stronger U.S. dollar (USD) also negatively impacted their results. McConville stated that while it is evident that McDonald’s seems to be on decline as a result of a demand from the public of healthier food, McDonald’s has now stepped up to the plate and are changing their offering.
Added to this, McConville also expressed that while McDonald’s has denied the possibility, he like the fact that the company could spin off its franchise locations into a “McREIT”.
From franchisees net rents, McDonald’s generates about $5 billion a year. While McDonald’s might play down the possibility of a REIT (real estate investment trust), McConville has made it quite clear that owning real estate is a ‘good to have’. If we include McDonald’s real estate assets, the company can be valued at between $115 and $120 a share, according to McConville. Today, McDonald’s is currently trading at $95.29 a share.
Does this mean it is time to invest in McDonald’s?
MT4 Chart: McDonalds
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