Can McDonald’s Break Out of Its Range?

With shares of McDonald's (NYSE:MCD) trading around $94, is MCD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

McDonald's franchises and operates McDonald's restaurants in the United States, Europe, Asia Pacific, the Middle East, Africa, Canada, and Latin America — so just about every part of the world. Its restaurants offer various food items, soft drinks, coffee, and other beverages, as well as breakfast menus. The products provided by McDonald's fulfill cravings at competitive prices in convenient locations worldwide. The McDonald's craze shows no signs of slowing, so the company has continued its expansion to just about every nation on the globe. As consumers continue to enjoy McDonald's products, look for it to see rising profits.

According to the Chicago Tribune, McDonald's is testing a mobile application called McD in 1,000 stores that sends customers offers they can redeem with their phones at participating locations. Users can't pay or order with the app, but they can clarify what kind of deals they are interested in, meaning a vegetarian won't get a deal for a buy one, get one a Big Mac, and a burger-loving carnivore won't get $1 off the next salad. The Oak Brook, Illinois-based company started testing McD about a year ago in San Francisco, and now St. Louis and Boston also host participating stores. Spokeswoman Lisa McComb said to the Tribune that the app can be downloaded anywhere, but consumers can only cash in on deals in participating areas.

T = Technicals on the Stock Chart Are Mixed

McDonald's stock has traded sideways in the last couple of years. The stock is currently pulling back and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, McDonald's is trading below its rising key averages, which signal neutral to bearish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of McDonald's options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
McDonald's options	14.20%	90%	88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
January Options	Steep	Average
February Options	Steep	Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on McDonald's’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for McDonald's look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	6.29%	4.55%	2.44%	3.83%
Revenue Growth (Y-O-Y)	2.39%	2.43%	0.90%	1.90%
Earnings Reaction	-0.64%	-2.68%	-1.95%	0.57%

McDonald's has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about McDonald's’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has McDonald's stock done relative to its peers, Yum Brands (NYSE:YUM), Burger King (NYSE:BKW), Wendy’s (NASDAQ:WEN), and sector?

	McDonald's	Yum Brands	Burger King	Wendy’s	Sector
Year-to-Date Return	5.63%	8.60%	19.06%	76.05%	12.09%

McDonald's has been a poor relative performer, year-to-date.

Conclusion

McDonald's is a well-recognized company that fulfills cravings and demand for quick and delicious food choices that many consumers across the globe enjoy. The company is testing a mobile application called McD in 1,000 stores that sends customers offers they can redeem with their phones at participating locations. The stock has been trading sideways in the last couple of years and is currently pulling back. Over the last four-quarters, earnings and revenues have been rising, which has left investors optimistic about recent earnings announcements. Relative to its peers and sector, McDonald's has been a weak year-to-date performer. WAIT AND SEE what McDonald's does this quarter.