I love McDonald's burgers, fries, and shakes. What I don't love is its current stock price.
Don't get me wrong, the stock's been a huge gainer over the past decade. It's risen more than 230% in the past ten years while throwing off decent dividend income.
But what's hard to digest, with the stock 5% from its all-time highs, is where it goes next.
If you own McDonald's (NYSE: MCD) or are thinking about buying it, here's what I suggest: tread carefully and put in a few simple hedges - like put options. There's definitely upside here, but investors have to protect themselves. And I'll tell you how.
Getting the Recipe Right
The first thing I look at when I'm analyzing a food company is the food. Like I said, I love McDonald's, at least the same few items I always get. As far as their other menu items, there may be too many.
Although it's nice to have a lot of options, McDonald's is a fast food joint, so I don't want to be overwhelmed by too many menu items.
In fact, analysts say McDonald's has too many menu items. In order to be more things to more people the company has been adding more and more items for years. But the Wall Street pro consensus is they've diluted their core higher-margin brand items with too many cheaper options.
When the company added "Dollar Menu" items, most of their regular patrons opted for the cheaper offerings and haven't ventured back to higher-margin menu items.
That plan backfired because while they originally planned on a limited Dollar Menu run to get back cost-conscious diners, business fell off every time the company tried to phase out Dollar Menu offerings.
Now company big-wigs are talking about changing the menu again.
The last two menu changes didn't help the company's slipping sales. So an investor in the stock has to wonder if company management has a clue what to offer their customers.
They might go more "wholesome," more "organic," more "socially and calorie conscious," or more "made-to-order." The problem with those changes is, while they may make sense on paper, they'll put Mickey D's into more direct competition with a host of casual-dining and hot-trendy competitors.
That's likely to turn off more traditional customers before it brings in enough new customers to give new items a try, especially if more "organically sourced" ingredients end up costing customers more. As far as revenues, that's a slippery slope.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.