A Great Stock to Own for Inflation
The most important thing to know as an investor is that the future is uncertain. No matter what kind of analysis and forecast study is conducted, the future is always a mystery. But there are rules of thumb investors can rely upon when it comes to forecasting the future course of the economy.
The primary rule of thumb is happening right now and will likely continue well into 2013. This rule states that loose monetary policy results in a weak U.S. dollar.
Weak dollar = inflation
The Federal Reserve has made it clear it will ramp up its monetary stimulus and keep interest rates low until unemployment drops to acceptable levels. In fact, the Fed has vowed to inject $85 billion into the economy every month and continue with low borrowing costs that should kick-start hiring and investing in order to spur the recovery.
A good way to think about this concept is by comparing it to the starter in your car's engine. It takes a jolt from the battery to turn the starter, which in turn starts your car's motor. The Fed's intervention is like the spark from your battery to turn the starter. Just like a car starter, businesses should be able to start the engine of the economy.
One possible side effect of the Fed's economic stimulus using liquidity injections is a weaker U.S. dollar. By adding more money into the economic system, the value of the existing money is diluted. In addition, the low interest rate environment works with the liquidity injections to accelerate the devaluation of the greenback.
As I said before, nothing is certain about the future, but the current economic policies are creating the perfect storm to knock the U.S. dollar lower.
How to profit during times of inflation
With this in mind, I started researching stocks that have outperformed the market during times when the U.S. dollar was weak. What I discovered is that multinational corporations based in the United States tend to outperform the market when the greenback is weak. These companies tend to have robust operations abroad, often in countries with stronger currencies than the U.S. dollar. So when it's time to report quarterly results, they must convert that higher-valued currency into the U.S. dollar. When this conversion takes place, the company's bottom line figure is higher.
And one stock that's perfectly positioned to take a big advantage from the falling U.S. dollar is fast-food giant McDonald's Corp. (NYSE: MCD).
The low-priced, recession-proof nature of McDonald's offerings is not the only reason this is my favorite play during times of inflation.
Foreign currency translation as a key factor that helped McDonald's post higher year-over-year revenue and earnings per share (EPS) during the third quarter of this year. This is because while it posted sales of $7.2 billion, which was relatively flat compared with the same period in 2011, revenue was still up 4% as a result of currency conversion. At the same token, while EPS was down 1% to $1.43, but up 4% in constant currencies.
Boasting a market cap of more than $90 billion, McDonald's operates in 119 countries serving nearly 70 million customers daily. During the third quarter, sales from Europe, where McDonald's has 7,100 stores, grew 1.8%, despite a drop in guest traffic. Here's another sign of how the weaker greenback can act as a positive counterpoint to modest consumer demand throughout the euro zone. Sales in Asia/Pacific grew 1.4% compared with the previous year.
The company also dwarfs its competitors with annual revenue of more than $27 billion. As a comparison, rival Burger King (NYSE: BKW) boasts a nearly $ 2 billion revenue, while Yum Brands (NYSE: YUM) has a $13 billion annual revenue. The stock is a good value right now. McDonald's price-to-earnings (P/E) ratio just under 17 is lower than Yum Brand's P/E ratio of nearly 20, for example.
The cherry on top is the company's 35 straight years of dividend increases with an annual yield of about 3.5%. This September, McDonald's increased the quarterly cash dividend by 10% to 77 cents per share - the equivalent of $3.08 per share annually.
Shares are down more than 10% from their January $100 highs. However, shares have rallied from the mid-November lows in the $83 range. The rally is struggling to break through the 200-day simple moving average at nearly $90 a share. A daily close above the 200-day simple moving average sets up a classic breakout trade opportunity.
Risks to Consider: While a falling greenback will likely help multinational companies like McDonald's, there is more to the picture. Despite McDonald's growth, dividend and competitive leading posture, it's important to know that the company is posting negative total returns this year of nearly 8%. This is very weak when compared to the benchmark S&P 500's overall returns of nearly 22%. Always be certain to use stops and position size properly when investing.
Action to Take --> Despite the overall yearly poor performance, McDonald's has posted total three-year returns of almost 59% and the November rally showed a nearly 6% total return. The company's savvy marketing, the falling greenback and improving worldwide economy will likely make 2013 a winning year for this hamburger favorite.
I like the stock as a daily breakout trade candidate, above the 200-day simple moving average. My 12-month target is $100 a share.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.