McDonald’s Stock: Safe Harbor in Rocky Seas?

McDonald’s (MCD) stock may have been trading sideways these past few months. However, if high volatility hits the stock market again, shares in the ubiquitous fast food chain may be one of the places investors dive into for cover. Therefore, I maintain Neutral sentiment on MCD stock.

Blue chip names like this one are likely to remain resilient even if investors become leery, either due to the inflation/interest rate issue or from another factor such as a slowdown in earnings growth. “Hotter,” more speculative names, like “meme stocks,” on the other hand, may see declines to a greater extent.

Many factors make this a great defensive, or safe harbor, stock. First, it’s a high-quality business with a deep economic moat. Secondly, it has a strong balance sheet and consistent cash flow. Thirdly, it offers up a solid dividend, with a high chances of its payout increasing over time.

These might not necessarily translate into a dramatically higher price for shares, if the markets get rocky. Yet providing a less-wild ride in the months ahead may be sufficient to attract investor attention. (See McDonald’s stock charts on TipRanks)

Despite Solid Earnings, MCD Stock has Stopped Trending Higher

As seen in its latest quarterly earnings report, the fast food giant has more-or-less recovered from the COVID-19 pandemic. Sales for the quarter ending June 30 were up substantially from the prior year’s quarter. That, of course, was expected, as the June quarter last year corresponded with the height of the COVID-19 lockdowns.

In turn, the company appears on track to deliver revenue and earnings results above pre-pandemic (2019) levels. Unfortunately, this has not bolstered enthusiasm for MCD stock. Investors have already priced-in its apparent comeback, given its rapid share price recovery seen in the second half of 2020. 

Furthermore, instead of putting more points into the stock, investors might instead get skittish, as risks brought up by management during the latest earnings call could mean disappointing results in the next earnings report. These concerns include supply chain and wage inflation risks, which are all part-and-parcel of the current economic environment.

In fact, it’s the possible slowing-down of earnings growth, for this and other major companies, that could kick off the next stock market correction. Some may worry that it means a repeat of March 2020 for McDonald’s stock. Yet, that may not be the case. Instead, the next correction could be a garden variety one, where a defensive name like this one remains resilient.

Safe Harbor Bona Fides

It’s too soon to say, but the Delta variant of COVID-19 may continue to have limited impact on the stock market. It may also have little negative impact on the “reopening” of the service economy.

On the other hand, the other factors mentioned above could cause markets to get volatile in the coming months. Will this affect the performance of MCD stock if it happens? Yes, however not to the extent that is likely seen in hotter, more overheated sectors, like tech.

That’s because, as discussed above, McDonald’s shares have numerous safe harbor bona fides. These include a strong business with deep economic moat, consistent free cash flow, and a solid dividend (2.14% forward year, with more than decade of payout increases). 

Together, these factors could make this stock alluring to investors, if it’s choppy waters ahead for the overall market. This may not result in another surge higher for the stock. Yet for investors looking for peace of mind, this may be just the ticket.

What Analysts are Saying about MCD Stock

According to TipRanks, MCD stock has a consensus rating of Strong Buy. Out of 25 analyst ratings, 22 rate it a Buy, 3 analysts rate it a Hold, and 0 analysts rate it a Sell.

As for price targets, the average McDonald’s price target is $267.76 per share, implying around 12.27% in upside from today’s prices. Analyst price targets range from a low of $232 per share, to a high of $295 per share.

Bottom Line

It’s unclear what, if anything, will negatively impact the stock market in the remaining months of 2021. Whether it’s hard times ahead, or if the runaway bull market experiences a soft landing, fear and uncertainty could continue to creep in for the time being.

As increasing fear and uncertainty make this safe harbor name more appealing, expect MCD stock to at least hold steady in the coming months.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.