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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!



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