Many investors look to valuations of the underlying before deciding on an investment but history has shown us that many underlying with good fundamentals and low valuations can stay undervalued for a significant period of time. Therefore, we must go deeper with our analysis to ensure we attain the highest probability of success on our respective underlying.
The great recession of 2008 taught many investors and central banks a lesson which I believe will not happen again for a significant period of time. Many bears are waiting for a pullback in US equity markets – a pullback that may never come. With the dollar coming off its highs, precious metals and especially oil have recently rallied strongly and if the dollar were to weaken more from here, I believe equities would also participate in the rally.
Inflation usually causes prices to go up in all asset classes and although commodities may be more undervalued at the moment, ongoing dollar weakness should boost earnings of many US multi-nationals. In fact, the more dovish the Fed gets, the more inherent weakness it is seeing in the US economy. Therefore, with Japan and Europe adopting huge monetary measures to stimulate growth, its baffling why many analysts believe that same won’t happen in the US. Investors need to understand that a rising stock market is not necessarily a sign of a stronger economy as markets are heavily manipulated at present. Therefore, markets could easily go higher but economic conditions could worsen (recession). If this hypothesis plays out, McDonald’s (NYSE:MCD) earnings multiple could go much higher and not lower like many bears think. Here is why McDonald’s stock might actually be a strong buy now which would destroy many bears currently shorting or about to short this stock.
Firstly, if you believe McDonald’s is overvalued at the current price of $123 a share and an earnings multiple of 25.9, well in 2007 the earnings multiple reached 30.5 just before the recession hit. However, it was its performance in the recession that really made this company stand out as a recession-proof stock. McDonald’s current 10-year earnings multiple average is 19.59 and the stock did eventually revert back to its averages but not in the way the masses believe it would have – a falling share price. In fact, earnings per share went from $1.98 in 2007 to $4.11 in 2009 which meant the share price didn’t fall at all despite the initial high price to earnings ratio. Now what we had in 2008 was a deflationary recession but the next recession I fear will be inflationary which should really boost McDonald’s stock price. Why?
