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Tuesday, March 10, 2015

Plummeting McDonald's Sales May Be An Economic Signal

A couple of years ago I wrote that one thing about downturns in the economy is that it causes people to, of course, scale back their purchases, and that means low-end retailers such as Dollar Tree, Dollar General, Walmart, and even thrift stores like Goodwill will tend to do very well since consumers are more concerned about value than necessarily quality, or customer service. That is not to disparage any of those companies on either quality of product, or quality of service, but simply to suggest that price becomes king in that kind of an environment. In that commentary I suggested that when the economy begins to fire up a bit, retailers to look at to buy shares in are slightly higher end, or steps up from the deep discounters. Places like Target and Kohl's, for example.

During the same period I also wrote about how well McDonald's stock performed throughout the entire recessionary period. To put it literally the stock was on fire, and that was because people were flocking to McDonald's stores, particularly interested in their value menu which offered consumers the best bang for their buck when it came to dining out. Even when it came to coffee, a cheap cup of what is arguably a noteworthy brew was just what the hurting consumer needed to get their coffee fix at a price that went easy on their wheezing wallets.

Interestingly enough, Starbucks did not fare all too poorly during the recession either, but that's another story. There's a different dynamic going on there.

McDonald's sales have taken a turn for the worst, having seen percentage decreases for nine straight months, and even Walmart has been seeing some declining sales.

With gas prices lower and jobs numbers higher, the shortfall in sales at McDonald's may actually be a lagging indicator of better times ahead. What it suggests is that people may be stepping up to slightly
higher end operators like Wendy's, Chipotle, and Panera Bread to name a few. Five Guys burgers are a strong competitor in this sector as well, and have been one of the fastest growing quick serve hamburger chains for some time now.  My gosh, if they went public, I would be one of the first guys in line.

Shake Shack may shake things up a bit as well for McDonald's. And actually Wendy's stock has been seeing new highs, so to my mind these are very clear signs that there is a paradigm shift in where consumers are spending their dollars.

And the begging question? Could it be that with lower gas prices and better job prospects, consumer confidence may be rising, and consumers are now willing to spend a little more elsewhere?

If that's the case, it could well be a signal that the economy may be getting better. I think it is too soon to tell for sure. Certainly I am not going to use hamburger sales alone as any indicator in the macro-economic picture. But in the micro it seems to at least make a suggestion which I think is worth taking a close look at.

People are beginning to make a shift in their spending, and McDonald's horrible sales numbers are making that all too clear. Stocks that I think are ripe for this environment are Wendy's and Chipotle (I'd stay away from Shake Shack), Whole Foods, Target, and I will go ahead and throw Darden Restaurants into the mix as well. These are companies I want to own right now. I think these companies are primed to benefit from any improvement in the economy, and I think stocks to avoid right now are stocks like Dollar Tree, Walmart, and yes. McDonald's. But do watch the company very closely. McDonald's has historically been able to weather many storms and has an uncanny ability to right its ship eventually. I do not recommend writing it off completely in the short term. But these other companies, I think, have a lot more going for them as it currently stands, and that is where I would put my investment dollars.

We're up for a ride, and the ones who will win are those who are treats to the American consumer if it becomes all too clear that we are headed for better times. In this case playing the value play is not as good a bet as playing the upgrade play.

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