Did you know that stocks that decline in price often deliver superior returns in the subsequent recovery?
According to Morgan Stanley research, a stock having recently fallen in price is associated with better-than-average returns in the recovery. The steeper the fall, the higher the subsequent returns.
So, stocks that are down by high percentages over prolonged periods of time are a good pile to go looking in.
A good starting point for finding such stocks is to look at names that are near their 52-week lows. Such stocks are often cheaper than the market averages, and in some cases, they are likely to recover. In this article, I will explore one stock that is trading near 52-week lows which I’d be comfortable buying today.
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McDonald’s
McDonald’s (NYSE: MCD) is a company that needs no introduction. The world’s biggest fast food chain by profit, it is ubiquitous and well known to just about everyone.
Brand value
McDonald’s is best known for its strong brand. The brand is recognized by billions worldwide, has powerful nostalgic associations, and is linked to consistency and convenience. The chain’s prices are pretty low, which gives it resilience during recessions. Overall, it’s a quality name that is likely to perform well over the long term.
Growth
McDonald’s, having saturated many global markets, is not a high growth stock. However, the company is not entirely lacking in growth. In the trailing 12-month period, it grew its revenue 6%, earnings 5.5%, and free cash flow (FCF) by 15%. Over the last five years, the company compounded its revenue, earnings and FCF by 5%, 6%, and 0.42%, respectively. So, not a lot of growth here, but not none. The company can likely count on its customers to stick with it through modest price hikes, providing an avenue to modest growth going forward.
Profitability
McDonald’s absolutely crushes the benchmarks when it comes to profitability. In the trailing 12-month period, the company had a 57% gross margin, 47.5% operating income margin, 32% net income margin, and 14.8% return on capital. These metrics suggest that McDonald’s is delivering a lot of shareholder value. Despite that fact, the stock is much cheaper than the U.S. and even Canadian market averages, trading at 18 times earnings and 14.4 times cash flow. This seems like a sensible price to pay for a wide moat stock like MCD.
A similar Canadian stock
Assuming you’re looking for Canadian stocks specifically, but like the thesis outlined on McDonald’s above, you could consider a stock like Restaurant Brands International (TSX: QSR).
QSR is the company that owns Burger King, Tim Hortons and Popeyes Louisiana Kitchen. These brands have strong recognition in many markets, with Tim Hortons in particular having some of the same advantages in Canada that McDonald’s has globally (recognition, nostalgic associations, etc).
In recent years, QSR has been doing a lot more growing than McDonald’s has. Over the last 12 years the company has compounded its revenue at 12%, earnings at 11%, and FCF at 7%. Being a smaller company than MCD that is far from saturation in most global markets, QSR probably has a longer growth runway than that company does. It also has a slightly lower P/E ratio: 17.7.
So, QSR could make a good MCD alternative for a Canada-focused investor.
