Investing is all about weighing the pros and cons of a specific investment given the uncertain nature of the future. Conservative investors tend to take a safety-first approach. This is why McDonald’s (NYSE: MCD) stock looks like a solid choice right now. McDonald’s business tends to do well whether there’s an economic upturn or a downturn. McDonald’s stock tends to navigate both bull and (continued) bear markets in a way that serves the investor.
There are several reasons why McDonald’s stock does well in a bull market, but this report is going to focus on three of them.
1. McDonald’s stock is forgiving when an investor makes the wrong call on where the economy is going
Nobody likes to make mistakes, but when it comes to investing they happen with regular frequency. Don’t feel bad about that, it’s part of the learning process. The best you can do, frankly, is consider what happens if you are wrong when you make a decision. For example, if you think there’s a bull market coming, you might be willing to invest more aggressively. If you recognize that the bear market might keep grinding along, you’d probably make more moderate decisions.
McDonald’s is an interesting, middle-of-the-road choice. It sells fast food in outlets around the world. If the fear of a recession in 2023 turns out to be wrong, more people will eat out and that will probably be good for the restaurant chain’s sales. No recession also suggests a market upturn. But, if there is a recession, the cost point McDonald’s occupies will likely see strong demand as people trade down to cheaper eating options.
To put a number on that, in 2022 McDonald’s noted that it faced material inflation headwinds and had to raise prices. That’s something that has been going on across the restaurant industry. But the interesting thing is that while prices were rising, McDonald’s estimates that it gained market share in key product categories. The company also highlighted “5% comparable guest count growth globally.” An economic downturn, which would lead to a lingering bear market, would probably be bad for McDonald’s business, but given its recent performance in a difficult business environment, it seems likely the company would perform better than its peers.
2. McDonald’s business (and its stock) benefits in a bull market
As already noted, if you are wrong about a bull market (which is often driven by an economic upturn), McDonald’s tends to have less downside risk to its business. But what about if an economic expansion actually does take hold? In that case, McDonald’s will likely see even stronger financial results. That’s because people will eat out more frequently and, like the company or not, McDonald’s is an iconic fast food chain that even people with discerning palettes will buy from. Sure, some customers will trade up to higher quality fare, but people who would otherwise have eaten at home will show up to take their place. And, even the folks that trade up are unlikely to completely give up on McDonald’s speed, convenience, and food consistency (it may not earn any Michelin stars, but you know what you’re going to get no matter which store you go to).
So you win if you are right and you win (or at least protect yourself to the downside) if you are wrong. That’s a pretty good choice in an uncertain time like today.
3. McDonald’s finances are rock solid
McDonald’s financial debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio is a reasonable 3.3 times. It covered its trailing 12-month interest costs, measured with the times-interest-earned ratio, by 7.7 times. And it has an investment grade-rated balance sheet. Having a strong financial foundation is clearly a good thing in a bad environment, but it’s also a good thing in a good environment.
Notably, McDonald’s isn’t sitting still, adjusting as the economy ebbs and flows. It has plans. The company currently intends to spend between $2.2 billion and $2.4 billion on capital expenditures in 2023. Most of that is going to be used to open 1,900 additional (mostly franchised) restaurants. Given the company’s financial strength, that’s spending that it can take on regardless of the business or stock market environment. And it should lead to long-term revenue and earnings growth, meaning McDonald’s will either get stronger in a bull market or get better in a bear so that it comes out stronger when the next bull arrives. Either way, that company’s solid foundation will help long-term investors win.
Bull or bear, McDonald’s investors win
It’s a fool’s errand trying to predict the future and a bull market could just as easily arrive as the bear market could linger. Given the uncertainty today, it makes sense for investors to err on the side of caution. McDonald’s business is made to order for those who think there’s an upturn coming, but are also cognizant that they could be wrong about the timing. A strong financial foundation and a business that sees solid demand in both up and down economies could, in the end, be the perfect play-it-safe choice.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.