Stocks are struggling to rally this month, and when they do they can’t sustain too long. So it’s not a surprise to see great company stocks fail to establish a bottom. Today we make the argument that McDonald’s (NYSE:MCD) stock is approaching compelling levels in spite of the risks at hand.
Speaking of which, there isn’t a shortage of things to fret. Wall Street investors cannot escape headlines these days, and on several diverse fronts. If it’s not one thing about war, it’s another about the Federal Reserve. Over the weekend an old threat resurfaced regarding lockdowns. China is back at those after a spike in Covid-19 cases there. For equities to find footing, the bears needed to lose a tail wind this week, not gain one.
As for the drop on Monday, I deem it as normal price action. The spike in bond yields clearly suggested that traders started to focus on the Wednesday Fed decision. If I am right, investors should accept that the risk is temporary. Therefore, it would be productive to spend time compiling lists of stocks to buy for a rebound. Eventually this too shall pass, and MCD stock will make for a happy meal.
Meanwhile, the Nasdaq and the S&P 500 fell 2% and 1% respectively Monday and more overnight. There were a few green stocks, but the negative breadth was broad. MCD did better than most, as it only fell 0.3%.
Risk appetite is waning thin for frothier stocks. I have dubbed this the unicorn effect, borrowing the term from a 2019 phenomenon. Wall Street lost all interest and no longer has tolerance for stocks with iffy fundamentals. This happened to Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) when they were unicorn IPOs. A current example would be Coupa (NASDAQ:COUP), which fell 29% Monday night. They beat earnings and grew the business, but investors punished it for weak guidance.
MCD Stock Has a Lot to Offer
Luckily MCD stock offers the exact opposite of the unicorn effect, because it is solid. They recently caused some drama with their boycott of business in Russia. Other than that, management is always on point. While the revenue line item is lackluster, they make it up with profitability. They do their job so well that they grew net income 45% to $8 billion since 2018. This is a mature company with steady-eddy performance. Such stocks could be safe havens for investors looking for basic ideas.
McDonald’s has also adopted technology well enough to stay relevant. They have been chasing the king of restaurant tech Chipotle (NYSE:CMG). Even with all its selling points, the stock has not found footing in months. There was a strong rally in late January but it came crashing down. The solid fundamentals did not make it immune to the overall bearish sentiment. By last Thursday, MCD had fallen almost 20% from the January highs.
Support Shows a Presence
The upside of having suffered so much downside is the new presence of support below. As MCD stock falls, it approaches areas that are likely to bring out buyers.
The zone around $213 per share has been in contention since 2019. This means that is has played both roles of support and resistance on several occasions. There are willing traders lurking, and they will fight for it.
Don’t take my word for it, because the volume profile (orange line on the chart) is proof. This is actual historical data, and it marks the highest volume node for the past five years. Both sides find MCD interesting around $213, so it will likely be a support zone.
Since the headlines are fast and furious, investors should have patience. I don’t expect the support to be a hard floor, but rather an elastic area.
Until we eliminate a few negative headline sources, we should temper our upside enthusiasm. The rules for that process involves, first not adding more risk to existing one. If I am long McDonald’s stock I would not add now. Moreover, if I am looking for new positions, I should only take a partial one.
Leaving room for later is the only way I can insure a reasonable entry price. When possible, I favor using options to implement bullish strategies that leave room for error.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.