close icon

McDonalds Investors Underestimate the Risks

After sharing our view on Coca-Cola last week, today we’re going to examine another American icon. McDonalds navigated the pandemic quite well. Sales and profits have been on the rise in the second half of 2020 and the outlook for 2021 is bright.

The stock market rewarded MCD investors accordingly. Shares reached a new record high of $232 in October, 2020, up 87% from the $124 March bottom. Without a doubt, McDonalds’ dominant market position and stable fundamentals warrant some premium. But is it worth the risk at the current price of $208? Let’s take a look at it from another angle.

McDonalds stock can lose half its value in a bear market

The weekly chart of McDonalds stock depicts something strikingly similar to a five-wave impulse pattern. It is labeled (1)-(2)-(3)-(4)-(5), where two lower degrees of the trend are visible within wave (3). Wave (2) coincided with the bursting of the dot-com bubble, while wave (4) occurred during the 2020 coronavirus selloff.

McDonalds Stock can Revisit the March 2020 Lows

Unfortunately for the bulls, the Elliott Wave theory states that a three-wave correction follows every impulse. The corrective phase of the cycle usually erases the entire fifth wave. Applying this to McDonalds translates into a decline back to the support of wave (4) near $120.

In addition, there is a strong bearish RSI divergence between waves (3) and (5). As the stock price kept rising, the strength behind every subsequent move has actually been decreasing. If this count is correct, a ~40% drop can be expected.

Besides, McDonalds can make around $6B in free cash flow in a normal year. At the current market cap of $155B, this gives a P/FCF of nearly 26. That’s a rather high multiple even for less mature growth companies. In our opinion, investors paying over $200 a share are not taking the risks properly into account.

Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!

Stay informed with our newsletter

Latest Elliott Wave analysis on different topics delivered to you weekly.

Privacy policy
You may also like:

MongoDB – Bearish Pattern Joins Nosebleed Valuation

MongoDB Inc. is a general purpose database platform developer and provider. The company was founded in 2007, but only came public ten years later – in 2017. During the following four years, the stock has risen from an IPO price of $33 to $515 a share as of last week. So, it is fair to…

Read More »

Pandora Does Things Right. Stock May Need a Breather

When we wrote our previous article on Danish jewelry maker Pandora in December, 2020, the stock was up over three-fold since March. That recovery from DKK 180 to DKK 651 didn’t not come out of the blue, though. It was the result of a bullish setup we managed to identify as early as July 2019.…

Read More »

Match ‘s SP500 Inclusion a Good Excuse to Reach $200

Match Group Inc. rose over 10% in post-market trading Friday following reports that it is going to be included in the S&P 500. The company, which owns Tinder, OkCupid and most other major dating apps in the U.S., has a market cap of over $41B. Despite the anticipated “summer of love”, though, this is not…

Read More »

Cameco Stock Seems to Have Finally Turned a Corner

Uranium spot prices are on the verge of breaking above $34/lb, up over 80% from the bottom of $18/lb reached in late-2016. Cameco, as one of the world’s top uranium producers, is now seeing its stock price rising in tandem. Yesterday, it closed at $19.16 after reaching $21.95 in June. We first covered Cameco in…

Read More »

A Fresh Look At Cigna ‘s Elliott Wave Super Cycle

In a case study article on Cigna, published in October, 2016, we examined how a fundamentally sound and undervalued stock can still drop nearly 90%. The reason for that crash didn’t lie in some company specific issue. Rather it happened to occur during the biggest financial crisis in 80 years. Nevertheless, we made the point…

Read More »

CBOE Takeover Rumor Lifts Stock to Elliott Wave Target

We first wrote about CBOE Global Markets less than eight months ago. The S&P 500 had already recouped all its COVID selloff losses and was hovering at new all-time highs. CBOE, in contrast, was still down 30% from its 2018 record, trading below $97 a share. For some reason, the market was ignoring the company’s…

Read More »

Ahead of Ulta Beauty ‘s 150% Gain Since Lockdown

Buying shares in a beauty retailer in March 2020 sounded like a crazy, stupid idea. Stock markets around the world were plunging at a record pace amid a global GDP crash resulting from government-enforced lockdowns. People were stockpiling necessities in preparations not to leave their homes in the foreseeable future. With COVID-19 cases rising everywhere,…

Read More »

More analyses