In my previous two posts I examined various fundamental and valuation metrics for McDonald’s using historical data over a 10-year time span. From these analyses, MCD was awarded 3 of 3 stars in the fundamentals section for having an average RoE of greater than 20% over the last 10 years, a dividend yield and dividend growth rate that should provide more income than a comparable investment in long corporate bonds over 20 years, and for having an adequately covered dividend and moderately leveraged balance sheet. Due to MCD trading above my calculated fair value, no stars were awarded for valuation.
Given that MCD has strong fundamentals, examining various technical analysis metrics can help to determine an appropriate entry (or exit) point for the stock.
One of the simplest screens for an appropriate entry point is the price that a stock is currently trading at compared to its 52-week high and 52-week low. For a graphical representation of prices and other technical indicators described below, the 52-week technical’s chart for MCD is presented below:
Figure 1: MCD Technical Chart
From the chart it can be seen that the stock has been gradually increasing throughout the past year. Relative to the closing price of $79.02 on November 19th, MCD is trading the following distance from its 52-week high and low:
|Price||% from value|
To conform to the ‘buy low, sell high’ adage, as MCD is trading within 2% of its 52-week high, and is greater than 10% from its 52-week low, no stars are awarded for this timing metric.
In addition to the simple screen based on 52-week highs and lows, I also track the 7-day, 7-week, and 7-month Relative Strength Indicator (RSI) values for each stock I follow. RSI is a momentum indicator that shows when stocks are overbought or oversold. When a stock is oversold on all three time frames (RSI < 30), that typically indicates a good time to buy. Similarly, when a stock is oversold (RSI > 70), that can indicate a good time to sell. The three RSI values for MCD are currently as follows:
With all RSI values relatively high on the index, and the 7-week and 7-month RSI values in overbought territory, no stars are awarded for this timing metric. A plot of the 7-week RSI indicator for the last year is in the technical’s chart presented in Figure 1. Examining the chart, it can be see that MCD has been in a strong uptrend the entire year with the lowest readings of near 40 in April.
To supplement the RSI calculation, I also examine the Moving Average Convergence Divergence (MACD) indictor. The one year MACD(12,26,9) chart is again presented in Figure 1 above. From this chart, it can be seen that MCD is currently treading water with its signal line and MACD approximately equal. Given that the histogram recently has turned negative and the 7-day RSI has retreated from overbought territory, the technical’s indicate that it may be a good time to reduce holdings of MCD.
Based on oversold RSI indicators and a MACD chart that has recently had a signal line cross, MCD earns no stars in this technical analysis metric.
Overall, MCD earned a total of 3 stars (out of 6) which gives MCD a ‘Hold’ rating. However, based on the technical analysis above, with MCD trading above its calculated fair value and technical indicators showing overbought, it may be a good time to start booking some profits and wait to re-enter the stock the next time it experiences a downturn.
Until next time,
Nathan @ EngineeringIncome.com
The data and opinions presented above are for educational purposes only and should not be construed as individualized investment advice or as a recommendation to buy or sell the securities in question. The investing methodology outlined on this site assumes that a stock will perform in the future as it has in the past. This is generally not true. It is the responsibility of individuals to perform their own due diligence and/or consult their investment adviser to determine the suitability of any given investment product for their specific situation. For more information, please see my disclaimer.
Full Disclosure: No positions as of the time of this writing.