A sudden, unexpected departure at McDonald's... Why the business will still be around for your grandkids... Full steam ahead into the 'Melt Up'?... Investors are fleeing to safe havens... What you should do instead...
Shares of fast-food giant McDonald's (MCD) tumbled to begin the week...
The sell-off occurred after the ubiquitous burger chain unexpectedly dumped highly successful CEO Steve Easterbrook over the weekend.
It seems Easterbrook had a "consensual relationship" with a subordinate. He was replaced as CEO by Chris Kempczinski, the head of the McDonald's USA division.
We don't know any more about what happened... nor do we want to. A relationship like that violates the company's Standards of Business Conduct... And the McDonald's board decided it needed to act. No one needs to cry for Steve. He knew, or should have known, the score.
What is important for us is where this leaves McDonald's, because Easterbook was great at selling hamburgers...
Easterbrook took over as McDonald's CEO in March 2015...
He followed the middling, three-year tenure of predecessor Don Thompson.
McDonald's missed its earnings goal in six of Thompson's first 10 quarters at the helm. And the results from his last quarter as CEO were horrible. As we wrote in the Digest at the time...
The fast-food giant earned $1.01 per share versus expectations of $1.06 (and down from $1.21 a year earlier). Earnings fell nearly 33%, from $1.2 billion a year ago to $812 million today. That was partially due to "negative guest traffic in all major segments." Revenue was $5.96 billion, just barely beating expectations of $5.95 billion (but still down from $6.7 billion a year ago).
Easterbrook got to work immediately...
McDonald's began serving breakfast items all day and testing customizable menu options. Easterbook also sold off thousands of its company-owned locations to franchisees. And he pushed new technology into the restaurants. The Stansberry's Investment Advisory team noted the benefits of this work just last month...
Since launching its "Experience of the Future" strategy in 2017, the company has been busy renovating its stores with self-serve kiosks that have digital touch screen menu boards. Kiosks generate higher average sales. It's already renovated 8,500 of its 14,000 U.S. restaurants, and plans to renovate all of them by 2022.
The company's earnings have risen every year since Easterbrook took over – from $4.5 billion in 2015 to $5.9 billion last year.
So it's understandable if Easterbrook's sudden departure spooked McDonald's shareholders... The stock fell nearly 3% on Monday. (Shares recovered some today, closing at about $192. However, the stock remains down from Friday's close of nearly $194.)
We have no idea if Kempczinski will do a good job. But the reality is, it almost doesn't matter...
McDonald's has been a mainstay in several of our portfolios over the years...
Notably, Porter and his team first recommended buying the stock in December 2012.
And Investment Advisory analyst (and Stansberry Venture Value editor) Bryan Beach reminded us in a conversation this week that it's the perfect example of the kind of capital-efficient business we believe people should buy and hold forever.
The company generates $4 billion to $5 billion a year in free cash flow and enjoys gross margins of 40% to 50%. With all that cash, it pays shareholders more than $3 billion a year in dividends.
This week's news represents the third CEO change that Investment Advisory subscribers have held McDonald's stock through.
And the last time Porter and his team got super bullish on the stock's upside potential was when they re-recommended it in November 2014... at the same time that the Thompson era was careening to an end.
Back then, the stock was trading for around $95 per share. It has essentially doubled since then. As the team said in that issue...
We often quote Warren Buffett saying, "When a business with a reputation for failure meets an executive with a reputation for brilliance, it is usually the business' reputation that remains intact."
In McDonald's case, the opposite is true. Most other companies would kill for McDonald's breadth, scale, brand, and competitive advantage. The company's CEO [Thompson] appears to be in over his head and on his way out.
Does that change the fact that kids will still be eating Happy Meals 20 years from now? We doubt it.
Bryan told us almost the exact same thing during our conversation this week...
We liked Easterbrook as an executive, but McDonald's is a juggernaut. It will be around for my grandkids. Leadership matters. But the corner office does not make or break our affinity for McDonald's business prospects.
About the worst Chris Kempczinski can do is give us a better price to buy more shares.
Meanwhile, the record-setting bull market keeps marching on...
The benchmark S&P 500 Index closed at yet another all-time high of 3,078 on Monday. It's now up roughly 23% in 2019.
As of the end of October, the S&P 500 was up about 21% this year. We're in rare territory... The index has only gained 20% or more through October seven other times since 1950.
And if history is any indication, the year-to-date performance of U.S. stocks should bode well for the rest of 2019...
Last Thursday, our colleague and Stansberry NewsWire editor C. Scott Garliss highlighted a recent study from market strategist Tony Dwyer and his team at Canaccord Genuity, the largest independent investment firm in Canada. As Scott wrote in the NewsWire...
[Dwyer and his team] were looking for historical examples of when the market has rallied 20% or more through the end of October given the S&P 500 Index is up 20.87% year to date.
Dwyer and his team point out that since 1950, there have been seven other times when the S&P 500 rallied 20% or more from January 1 through October 31. Then they studied the returns for the remainder of the year in each instance.
What they found was a median return of an additional 5.9% into year's end.
In other words, we can expect the S&P 500 to set more all-time highs in the months ahead.
Now, this doesn't necessarily mean you should go 'all in' on stocks today...
In a recent podcast with Ritholtz Wealth Management CEO Josh Brown – author of the financial blog, The Reformed Broker – Dwyer also addressed the potential downside of the S&P 500's performance so far this year.
According to Dwyer, the three worst fourth-quarter losses in the S&P 500's history all occurred with the market up double-digit percentages through the first three quarters. They were a 28% drop in 1929, a 23% drop in 1987, and a 14% drop last year.
Similarly, that history doesn't mean you should "sell everything" right now, either.
As always, we urge Digest readers to be smart about your portfolio... Diversify your investments across different asset classes and manage your risk appropriately.
Still, it's important to know your history when deciding whether to 'stay long' or not...
That's exactly what our colleague Dr. Steve Sjuggerud and his research team continue to remind subscribers.
Despite widespread negative investor sentiment related to the ongoing trade war between the U.S. and China, as well as fears of a possible recession, Steve and his team recommend staying long stocks.
As regular readers know, Steve believes we'll see a final "Melt Up" in U.S. stocks before it's all said and done. The final stage of bull markets is typically marked by investor euphoria.
But we're not seeing 'euphoric' behavior today...
In fact, it's quite the opposite.
In today's issue of Steve's free DailyWealth e-letter, analyst Chris Igou noted that many investors have fled out of stocks and into "safe haven" assets – like bonds and precious metals – this year. These folks have left a lot of gains on the table. As Chris wrote...
American stock funds have seen $100 billion in outflows in 2019. Meanwhile, more than $350 billion of inflows have poured into bonds... while more than $430 billion flowed into cash.
But if you've stayed on the sidelines in 2019, you've missed out on some big gains...
As Chris explained, investors should be clamoring to buy U.S. stocks as they march to new all-time highs. So far, they're not. But as he explained, this situation won't last forever...
Soon, fear of missing out will call investors back to stocks. They'll get greedy. And as investors start to pile back into the market, we could see much higher stock prices...
In fact, that's exactly what's likely to fuel the final stage of the Melt Up that my colleague Steve Sjuggerud is calling for. And it's why you need to still be invested today.
How should you stay invested? That's a matter of opinion, of course...
Just yesterday, for example, Extreme Value analyst Mike Barrett showed Digest readers that now is a great time to get involved in certain value stocks...
And on Friday, the Investment Advisory team made their latest long-term stock recommendation on a company that's disrupting the "hottest sector in the market."
Our point is... following all of the recommendations from our more than 30 editors and analysts can be overwhelming for a lot of folks. You might not know where to start.
This is one of the biggest concerns we hear... And we estimate that about 90% of our subscribers' actual investment results are dictated by their allocation decisions – how much money they actually put into each stock – not which particular stocks they buy.
That's why we've created a product that puts all of our highest-conviction picks into one portfolio. This hand-picked, fully allocated portfolio is up 32% so far this year... In other words, it's outperforming the surging S&P 500 that keeps hitting new all-time highs.
Regular Digest readers know we've been celebrating Stansberry Research's 20th anniversary over the past week. As part of the celebration, you can get access to this product for a super-low price that we likely won't offer again. Click here for all the details.
New 52-week highs (as of 11/4/19): DocuSign (DOCU), iShares Select Dividend Fund (DVY), SPDR Euro STOXX 50 Fund (FEZ), Ingersoll Rand (IR), JD.com (JD), JPMorgan Chase (JPM), Nuveen Preferred Securities Income Fund (JPS), NetEase (NTES), Nvidia (NVDA), Invesco S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Financials Fund (UYG), and Vanguard S&P 500 Fund (VOO).
A quiet day in the mailbag. What are your thoughts on this bull market? Will you stay in stocks through the end of the year? As always, e-mail us your comments and questions to feedback@stansberryresearch.com.
Regards,
Carli Flippen and Corey McLaughlin
Baltimore, Maryland
November 5, 2019