McDonald's: Is the Street lovin' it too much?

In a post on Friday, Brian White noted that McDonald's Corp. (NYSE: MCD) was featured on the cover of BusinessWeek. I read through the article and found it fairly upbeat about the company's prospects. To a contrarian like me though, an upbeat cover story isn't necessarily a good thing. The reason why has to do with expectations.

When positive developments are featured on a magazine cover, the chances are good that this information is already widely known on the Street. In other words, you are likely getting nearer to the end of a trend than to the beginning. (More information about using cover stories as a contrarian indicator can be found here.) In terms of the trend being closer to the end, I think it is also worth pointing out that many on the Street have already jumped on board. According to Zacks, 10 of 15 analysts (67%) currently rank the stock with a "buy" rating.

The article observes that McDonald's has been very successful in defending against competition and I have no arguments with that analysis. However, it is also noted the stock is trading at a seven-year high but no one seems concerned the stock may have gotten a bit ahead of itself. As an example of what I mean, check out the chart below.



This graph plots McDonald's five-year performance (blue line) against that of the broad market, as measured by the S&P 500 Index (red line). For much this time, McDonald's has tended to trade in-line with the market, with the two standout exceptions being early 2003 and now. In 2003 the stock underperformed the market for a few months before "snapping back" in-line. The current situation is opposite in that McDonald's has been outperforming, but I wonder if the same "mean reversion" situation couldn't play out?

Nick Perry is an analyst with Schaeffer's Investment Research.