McDonald's Stock Could See Good Days Ahead

Posted 08 Mar 2019 10:27 AM Edited 08 Mar 2019 10:32 AM

McDonald's stock was down just over 1% in Thursday trading, but has rallied more than 12% so far this year. 

The back story. McDonald's hares got a boost from 2018's flight to safety. The company also has started to see the benefit of investments in remodeling locations, increased its dividend, and reported better-than-expected fourth quarter earnings. 

What's new. In the first two months of 2019, McDonald's had gained a larger share of overall fast-food related activity on Instagram, both year-over-year and quarter-over-quarter, Guggenheim analyst Matthew DiFrisco said in a note to clients on Wednesday.

'Our proprietary channel checks suggest YTD McDonald's has improved its brand share among social media posts,' DiFrisco wrote.

The brand's share of fast-food Instagram posts started dropping in March 2018, but has increased so far in 2019 and is now close to its previous levels, says DiFrisco, who has a buy rating on the stock. He also points out that the pickup began even before the company started heavily promoting new menu items and beverage discounts like $1 any-size soft drinks in the U.S.

Looking forward. The question for investors, of course, is whether McDonald's improving share of fast-food-related Instagram posts will translate into financial results, but DiFrisco notes that management also anticipates the company's promotions will help boost the brand's breakfast and afternoon traffic. 

The Dow is on the verge of a bullish golden cross

Posted 08 Mar 2019 10:24 AM Edited 08 Mar 2019 10:33 AM

The Dow is on the verge of a bullish golden cross, but stock-market analysts aren't exactly cheering

It should be time for celebration on Wall Street. A bullish golden cross is on the verge of materializing in the 122-year-old Dow Jones Industrial Average, coming after an anxiety-provoking dip more than two months ago. 

However, the formation, which is widely viewed as an upbeat signal, comes amid a torrent of market indicators suggesting stocks aren't entirely primed to explode substantially higher and could even break lower.

As of Thursday, the Dow's DJIA, -0.78% 50-day moving average was at 24,736.36, while the gauge's 200-day moving average was at 25,125.81, FactSet data show. At current levels, the short-term average is just about 390 points, or about 1.6%, short of crossing above the longer-term average.

Check out: MarketWatch's daily snapshot of the market 

Many technicians believe that when the 50-day average crosses above the longer-term 200-day line, that this relatively rare event marks the point where a shorter-term rebound morphs into a longer-term uptrend. 

A death cross, where the 50-day falls beneath the 200-day, forming a bearish chart pattern, occurred back in December, with that downtrend culminating in the broader U.S. equity market's suffering the worst trading day before Christmas ever. 

Since then the Dow has been in ascent, gaining 16.9% since that Christmas Eve nadir, while the S&P 500 index SPX, -0.81% has climbed 16.9% and the Nasdaq CompositeCOMP, -1.13% has rallied 20% over the period. 

More recently, however, the path of least resistance for stocks has been lower, amid growing fears that recent policy pivots by central banks in Europe and the U.S. may further highlight the cracks already showing in the global economy.

On Thursday, the European Central Bank unveiled plans to deploy additional stimulus, raising fresh worries about the health of the eurozone, with Italy in recession and Germany's economy under pressure. The ECB's move comes weeks after the Federal Reserve, citing concerns about economic contraction abroad, halted its rate-hike initiative. 

The Fed's decision had initially given investors reason to push stocks upward because it had signaled to some that policy makers were being responsive to signs of tightening financial conditions and sluggish growth that could have knock-on effects domestically. However, the convergence of dovishness from global central banks may be eroding confidence that the investing climate in the U.S. will remain a favorable one. 

Indeed, the Dow and the S&P 500 have fallen in seven of the past eight sessions, including Thursday's retreat. And the Dow Jones Transportation Average DJT, -0.96% often used as a barometer of the health of the U.S. economy, notched its longest losing streak in about a decade, at 10 consecutive sessions, at Thursday's close, matching a stretch ended Feb. 23, 2009, according to FactSet data. 

As for the golden cross, John Kosar, chief market strategist at Asbury Research, told MarketWatch that the golden cross is a good indicator to signal to investors what has already happened but isn't as predictive in the short and near terms. 

'Death crosses and golden crosses for me are like the wake of a battleship crossing the wake of an aircraft carrier,' the technical analyst said. In other words, by the time one of those patterns forms they may not be useful as a guidepost forward. 'Those are two big boats that take a long time to make a turn [and] it's really late by the time they cross,' Kosar said. 

Kosar said that he's looking at the S&P 500's failure to hold above a psychologically significant level of 2,800. After finishing above that level on March 1 for the first time in months, the broad market benchmark has stumbled ' a potentially ominous sign, according to the Asbury analyst. He said that the key level to watch now is 2,750, with failure to hold above that now possibly leading to further selling and pushing stocks to 2,675.

'I can see we're starting to come into a golden cross [on the Dow], and that kind of tells me more about momentum than it does about what is going to happen this week or next week,' he said. 

Katie Stockton, technical expert and founder of Fairlead Strategies, took it one step further, adding that she believes that despite the gains stocks have enjoyed in the past two or three months, they remain in a downtrend. 'The risk,' she told MarketWatch, 'is still pretty high.'

Stockton said intermediate volatility in markets also makes it challenging to determine whether equities are in a bottoming process, where a lower low ' lower than the Dec. 24 nadir, that is ' could result. 

One upbeat indicator for Stockton would occur if the market falls but remains above that Christmas Eve low.

She relies on CNN's Fear & Greed index as a further tool that shows Wall Street could be susceptible to a further downdraft. That index, ranging from 0 to 100, with readings below 50 pointing to more fear than greed, is showing a reading of about 59; it was at 72 last week. Stockton said she uses it as one contrarian measure that can signal short- to intermediate-term overbought or oversold conditions in the market.

As for the Dow, Friday's jobs report could be an important point for Wall Street. 

'It could be a decision point for the market,' Kosar said

Starbucks Stock Is Simply Too Hot

Posted 22 Feb 2019 09:18 PM Edited 22 Feb 2019 09:20 PM

Starbucks Stock Is Simply Too Hot

I've been bearish on Starbucks(NASDAQ:SBUX) stock for some time now. That skepticism looked prescient a year ago, when SBUX stock touched its lowest levels in almost three years. Since then, however, Starbucks stock has soared: SBUX at the moment trades near its all-time high.

Why Starbucks (SBUX) Stock Looks Overheated at Current Levels

Despite the volatility of the stock, Starbucks' outlook doesn't seem to have changed all that much. Starbucks' business is up there with McDonald's (NYSE:MCD) as one of the best in the world.

But the valuation of SBUX stock has been worrisome for a long time, and SBUX is facing meaningful risks. By placing a huge bet on China, SBUX has made a wager that looks increasingly dicey as the economy in that emerging market shows signs of slowing down. Meanwhile, the same-store sales and traffic growth of Starbucks' U.S. business has slowed.

While SBUX stock has gained a whopping 50% from its late-June lows, its risks persist. In fact, several of those risks were highlighted in the company's first-quarter results last month that helped push Starbucks stock to its current highs. Given those concerns, and an increasingly stretched valuation, it looks like SBUX stock has run too far.

Starbucks' Q1 Earnings

Looking at the headline Q1 numbers, investors could easily believe that SBUX did well. Propelled by a 4% same-store sales increase, its revenue rose 9%. Adjusted earnings per share climbed 15% year-over-year. Both figures were nicely ahead of analysts' consensus outlook, and seem to foreshadow a potentially strong fiscal 2019.

But the quarter isn't nearly as impressive as it seems on the surface. Comp growth of 4% seems impressive, but three of the four percentage points were generated by price hikes. In the U.S., traffic was flat year-over-year (as it was in the same period a year earlier), further suggesting that the business has reached a saturation point domestically. In China, comps rose just 1% year-over-year, while the number of transactions declined 2% YoY.

Meanwhile, the company's earnings growth came almost solely from a lower tax rate. Adjusted operating income actually declined 1.2% YoY. Margins dropped 1.7 percentage points.

Still, there are reasons to worry about the company's near-term profit outlook, even though its sales are growing. And some of the longer-term concerns raised by the company's Investor Day late last year haven't eased.

SBUX stock now trades at almost 26 times the midpoint of its updated EPS guidance. That's a high valuation, and one that suggests that everything will keep going smoothly.

From here, $71.54 looks like a potential peak for SBUX stock. The 26 multiple is towards the high end of the company's multi-year range. It's a multiple that likely requires the U.S. stock market and the company's overseas business to continue to be strong.

Starbucks still is adding new stores in the U.S. But the pace is slowing; its domestic store count rose just 4% year-over-year last quarter. With nearly 15,000 stores, SBUX likely is running out of room.

And its European business is improving, as a turnaround there takes hold. But the big growth driver of Starbucks stock is China.

Luke Lango argued on this site that the struggles of Apple (NASDAQ:AAPL) in China raised some concerns about the country's economy, and he makes a good point. Clearly, Chinese customers are more budget-conscious than they were a year ago.

Weakness in China won't bring Starbucks' growth story to an end. But it certainly would slow SBUX down and hurt SBUX stock. I noted in December that Starbucks already has brought down its long-term EPS growth target to roughly 10% per year from 12% previously. Unexpected troubles in China would drop that growth to the single-digits. And as embedded as Starbucks is in the U.S., in particular, it's tough to see investors paying 26 times earnings for 8%-9% annual EPS increases.

The risk facing SBUX stock is not necessarily that  Starbucks' growth is going to stop, but that it will slow enough to give investors pause. Currently, SBUX's FY20 EPS is on a pace to be about $3; cut that figure to $2.90 and bring the EPS multiple down to a still-reasonable 21 times, and SBUX stock would drop to $60. Add in any macro worries in the U.S. or Europe and the decline could be steeper.

All told, it does look like SBUX is approaching a ceiling. It's difficult to imagine its earnings multiple expanding much more. SBUX may outperform expectations this year, but it's seemingly equally likely that it could stumble, particularly in Asia.

SBUX stock shouldn't be shorted, by any means; it simply seems like there are better, and potentially easier, ways to make money. A few good quarters have sent Starbucks stock 50% higher. It would probably only take one bad quarter to reverse at least some of those gains.

Marathon oil corp (MRO) NYSE - strong momentum

Posted 15 Feb 2019 05:23 PM Edited 15 Feb 2019 05:23 PM

Louisiana-pacific Corp (LPX) NYSE

Posted 14 Feb 2019 08:38 PM Edited 14 Feb 2019 08:44 PM

 Buy on pull back

Nvidia Reports Earnings With the Stock Trading in a Buy Zone

Posted 14 Feb 2019 04:36 PM Edited 14 Feb 2019 04:51 PM

Nvidia Reports Earnings With the Stock Trading in a Buy Zone

Nvidia Corp (NVDA) had been one of the strongest momentum stocks since February 2016 but the stock crashed since setting its all-time intraday high of $292.76 on Oct. 2. The stock is now in a buy zone between my weekly value level of $143.86 and my monthly risky level at $156.41.

The stock closed Tuesday at $151.17, up 13.2% so far in 2019 and up 21.5% since setting its Dec. 26 low of $124.46. This bull market action compares with the bear market decline of 48.4% from its all-time intraday high of $292.76 set on Oct. 2. What's important for the bulls is that Dec. 26 was a "key reversal" where the close of $133.10 was above the Dec. 24 high of $129.98.

Demand for semiconductors is an important economic indicator as almost every electronic product we buy contains computer chips - from our smallest handheld devices to the automobiles we drive. Nvidia provides gaming applications, operates data centers, provides chips for automotive applications and operates as original equipment manufacturing using the company's powerful intellectual property.

Analysts expect Nvidia to report earnings between 74 cents and 79 cents a share when they report after the closing bell on Feb. 14. Bernstein is ignoring the turnaround by downgrading the stock to market-perform from out-perform lowering their price target to $170 from $250. This seems meaningless with the stock trading at $151.17. On the other side of the coin, Oppenheimer reiterated their outperform rating with a $190 price target. Nvidia had a 13-quarter winning streak on beating earnings-per-share estimates but that ended on Nov. 15 as the stock was already crashing.

The daily chart shows that Nvidia suffered a "death cross" on Nov. 13 just before the negative reaction to earnings released on Nov. 15. A "death cross" occurs when the 50-day simple moving average falls below the 200-day simple moving average and indicates that lower prices lie ahead. The stock declined into Dec. 26 when the stock traded as low as $124.46. Dec. 26 was a daily "key reversal" as the Dec. 26 close of $133.10 was above the Dec. 24 high of $129.97. The close of $133.50 on Dec. 31 was the input to my proprietary analytics and set three horizontal lines on the chart. My annual value level is $131.80 with my semiannual and quarterly risky levels at $213.01 and $258.21, respectively. Investors could have bought the stock at my annual value level at $131.80 as 2019 began and again between Jan. 28 and Jan. 30. The Jan. 31 close of $143.75 resulted in my monthly risky level at $156.41. My weekly value level is $143.86.