McDonalds (MCD)

This is a new entry into his portfolio. It owns 37,000 restaurants, 92% of them franchised. They typically own the land that the restaurant is on and the franchisee leases it. This creates a very stable flow of cash. Same store sales are growing well. They are innovating in food choices and in payment methods. They have allocated $6 billion for upgrading their restaurants by 2022. The average spend at restaurants is increasing and at all time highs. Yield 2.5%. (Analysts’ price target is $184.20)

They demonstrate everything that is negative about stock buybacks. You erode your book value and now they trade at 100 times book value. It is trading at only 20 times earnings, however. He calculates a fair market value 46% lower than where it is now. The balance sheet is mediocre, but not strong. He does not think you are buying anything of value with this one.

Likes it. Management has done a fine job transforming the company by introducing fresh food, the all-day breakfast, and now fresh burger meat. They are Doing well in mobile pay and introducing delivery. They are keeping current with the times. It isn't a cheap stock, but decent.

This has negative equity (negative price to book). They blew out all their equity in stock buybacks and other payouts. Passive investing has created a growing trend among S&P-500 companies to ignore their valuation because ETF investors don’t do any analysis. This is evident among defense stocks, consumer discretionary companies, consumer staples, and so on. He does not see companies like this going higher and if the company ever stumbles, there is no book value to fall back on.

Fast food is cyclical based on gas prices. Restaurant sales took off when gas prices plunged in 2014. Also, restaurant haven't seen earnings growth vs. other consumer discretionary spaces. He doesn't see a catalyst for this stock to
improve. That said, it's had a good, long history and their foreign sales are a tailwind.

Pizza or burgers? McDonald’s has a slight edge over Dominoes. At a 20 PE ratio, MCD-N has a better valuation, whereas DPZ-N still needs to grow into its PE ratio a bit more. He likes both companies with good management and good secular growth. A more conservative position is with MCD-N.

It's a both a quick-service restaurant and a REIT. REITs are under pressure, because they're interest-rate sensitive. Restaurants are performing pretty well, including McDonald's. Building digital kiosks in their stores is a good move. But other restaurants, such as Domino's Pizza, have a better growth rate. McDonald's will grow its dividend over time and probably operform in the middle of the pack for a while.

(A Top Pick June 13/17 Up 11%) He is happy with this as they continue to develop mobile applications and rivals Starbucks. They have a great distribution as well. Worldwide sales are rising. Over the past three years the stock price increase has been stellar.