In a strategic portfolio adjustment, it has been decided to sell 230 shares of McDonald’s (MCD) at a price approximating $267.20. Post-transaction, McDonald’s will represent about 1.5% of the total portfolio. This decision underscores the importance of maintaining an objective perspective on investment holdings, avoiding emotional attachments, and responding adaptively to evolving data.
A key factor in this decision is the analysis of restaurant spending patterns which significantly influence McDonald’s stock performance. Year-to-date, McDonald’s shares have decreased nearly 10%, underperforming relative to the broader market. This downturn is magnified by a 6% decline in our position’s value, prompting a thorough review beyond the initial positive indicators from the March Retail Sales report which showed a 6.5% increase in restaurant sales.
Further scrutiny, including additional data from Bloomberg on credit and debit card spending, reveals a worrying trend: while overall restaurant sales growth slowed in March to 3.8% from February’s 4.2%, McDonald’s experienced an even sharper slowdown. In contrast, competitors like Domino’s (DPZ), Papa John’s (PZZA), and others have seen accelerating growth rates. Although McDonald’s U.S. sales met Wall Street’s expectations with a 4.5% increase year-over-year, concerns are mounting due to anticipated declines in international markets, exacerbated by geopolitical tensions in the Middle East and market challenges in China.
Additional economic pressures include potential disruptions from McDonald’s key supplier, Lamb Weston (LW), which recently lowered its revenue projections, and the looming threat of record-high beef prices, which could compress operating margins significantly. The backdrop of these supply and cost challenges includes the implementation of a $20 minimum hourly wage in California, further straining financial forecasts for the fast-food sector.
Given these factors, coupled with modest expectations for earnings per share growth in 2024 and 2025, the outlook for McDonald’s suggests limited potential for price-earnings multiple expansion. In light of these analyses, the decision has been made to downgrade McDonald’s from a Two rating to a Three, reflecting increased caution and a strategic shift towards potentially more lucrative opportunities. Alternative growth prospects are being considered, with companies like The Trade Desk (TTD) and Welltower (WELL) identified as promising candidates should favorable pricing conditions arise.
This portfolio adjustment represents a proactive approach to investment management, seeking to optimize returns while navigating a complex and evolving economic landscape.