Bulls, burgers, and earnings beats
02/01/18

In the markets, it sometimes seems like no good deed goes unpunished. When McDonald’s (MCD) released Q4 earnings on Tuesday, it may have expected a nice bump in its stock price, even if it was already up around 60% since October 2016 and had hit a record high of $178.70 on Monday. After all, the company beat earnings estimates by 12 cents ($1.71 vs. $1.59) and topped revenue by $110 million ($5.34 billion vs. $5.23 billion).

Instead, shares dropped around 3% on the day and followed up yesterday with more (but milder) selling. What gives?

Well, for starters, MCD’s decline was part of a broader market sell-off (the S&P 500’s first multi-day decline of the year) that had many pundits—who were already jittery about the market’s stratospheric levels and lack of significant retracements—tripping over themselves to question whether the bull was finally being put out to pasture. (Sidebar, Your Honor: This is irrelevant. No one will know the market has topped until well after the fact.)

McDonald’s (MCD), 1/22/16 – 1/31/18

Source: OptionsHouse

Also, the chart above, which flags McDonald’s earning releases since April 2016, shows this isn’t the first time the stock has pulled back on the day of an earnings release, or in the first few days after it. In fact, the stock has had several multi-day pullbacks during its current uptrend, some associated with earnings releases (all but one of which since July 2015 have surprised to the upside), others not.

Digging below the surface of Tuesday’s numbers reveals what appears to be mostly positive trends: 10 consecutive quarters of worldwide sales growth (at restaurants open at least 13 months), and the strongest full-year comparable-store sales in six years, with much of the strength attributed to the chain’s successful Value Meals.1 On the downside, McDonald’s also revealed it anticipates spending $2.4 billion (vs. an expected $2 billion) to upgrade its stores.2

McDonald’s (MCD), 9/22/17 – 1/24/18

Source: OptionsHouse

The chart above shows the Tuesday-Wednesday down move bottomed near the December 22 swing low of $170.55; the next major chart support level is roughly $10 lower, around the October and November lows. In terms of similar pullbacks in the past, McDonald’s has had a 2-3% down day following a 20-day (or longer) new high more than 130 times since 1970 (although only three in the past five years), and the stock has tended to trade below the low of the down day for an additional four to five days before turning back up.

A significant penetration of the December support level (e.g., at least one close that is more than marginally below it), could put the October-November lows in play, although some bulls may eye the current pullback level as a place to try to take a bite out of the Big Mac, since the implied risk on the position (a move below yesterday’s low) is relatively small—and much smaller than the move to the stock’s recent highs.

 

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1 Forbes. McDonald's Is 'Lovin' It.' Well, Almost. 1/31/18.

2 Barron’s. McDonald’s Sinks as Spending Trumps Earnings. 1/30/18.