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Is McDonald's Stock Now a Buy?

Stocks in this article: MCD

By James Brumley

NEW YORK ( StreetAuthority) -- What a difference five months can make.

Back in January, McDonald's (MCD) was trading at $102, thanks to 2011's strong 34% rally, and more and more investors were excited to step into what looked like a well-established ride up.

Looks can be deceiving.

Not only did the rally not continue, but as of two weeks ago, shares of the world's biggest restaurant chain have actually lost 11% of their January peak, with no apparent floor in sight.

What happened to McDonald's to merit such a reversal of fortune for shareholders? That's just it -- nothing really happened to the company. The stock simply took on a life of its own.

For investors who understand that a stock's price can sometimes disconnect from the company's actual performance, these wild swings can represent outstanding entry and exit opportunities.

In fact, that window of opportunity is open right now.


Though they may not know it, investors can collectively be quite intuitive.

The gradual pullback that began in mid-January was due to no apparent reason at the time.

Then things started to make sense.

A couple of weeks ago, McDonald's cautioned that the second quarter's per-share earnings figure was going to be about 5%, or 7 to 9 cents, lower than first anticipated. Shortly after that, Goldman Sachs downgraded the company from buy to neutral.

But regardless of weaker short-term quarterly results, McDonald's is still a great stock to own.

Envisioning long-term performance is crucial for a stock like this. In 2011, for instance, per-share earnings improved by 14% from 2010's $4.61. And as previously noted, McDonald's shares rallied 34% in 2011, sending them up to a price-to-earnings ratio of 19.6 by the end of December. That's a valuation that hadn't been seen since 2007, and investors likely knew they were pushing their luck then, too.

So where's the stock valued now? At a trailing P/E of 16.8, which has been McDonald's average P/E figure for the past three years. Translation: This is a fair price for the stock.

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