Now Is the Time to Take Profits in McDonald's

Lost your appetite for the fast-food behemoth? Then sell ahead of earnings Tuesday.
By Richard Saintvilus ,

McDonald's (MCD) - Get Report , the fast-food behemoth will report second-quarter results before the opening bell Tuesday.

Sell now. Here's why.

For one thing, shares are likely to drop after the earnings because McDonald's is likely to guide conservatively to offset pressures not only from the strong dollar, but also the unknown long-term impacts of Britain's vote to leave the European Union.

Another reason is "All-Day Breakfast" is getting old and the company needs to come up with new, hot products to revitalize sales and push up the stock, which is currently around $127.

In the meantime, expect some tougher year-over-year comparisons. Take a look below, courtesy of TradingView.

The shares, which have risen almost 4% in the past five days, have returned some 8.5% year to date, over the 6% rise in the S&P 500 (SPX) and the 7% rise in the PowerShares Dynamic Food & Beverage ETF (PBJ) - Get Report  that tracks the industry.

Fundamentally, MCD is no longer on the value menu. Aside from trading at near all-time highs, the stock is priced at 23 times fiscal 2016 estimates of $5.53 per share, compared with a forward P/E of 17 for the S&P 500 index. The stock is now just 1.3% away from its consensus price target of $130, suggesting analysts don't see much upside from here unless McDonald's crushes earnings and raises guidance Tuesday. 

From a technical perspective, MCD must first show that it can break above its current resistance level of $128 before it can go higher. That's not enough of a premium, considering the stock must also test its lifetime-high of $131.96 reached in May. From the chart, you can see that the stock took a double-digit hit, falling to $116, the last time that threshold was reached.

As it stands, MCD is now in no-man's land, meaning everything must go right just for the stock to yield returns of around 3%. It makes more sense, then, to own the PBJ ETF, which not only gives you McDonald's exposure but offers more upside potential.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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