The Dangers Of Shorting McDonald’s Stock Now

McDonalds (NYSE:MCD) definitely built on the initial momentum it gained in its third quarter earnings last October when the company finally announced that its same store sales in the US grew for the first time in 7 quarters. Fourth quarter earnings built on that momentum with the restaurant chain’s “all day breakfast” becoming the chief instigator of continued growth in the US. However, investors are stating that Mcdonald’s valuation is getting on the high side which is definitely true from a historical perspective.

The company now has an earnings multiple of around 25 and a forward earnings multiple of just under 20 which undoubtedly makes McDonald’s stock expensive considering revenue growth and earnings growth is still negative on an annual basis. To give you an idea, McDonald’s produced net income of $4.53 billion in 2015 and revenues of $25.41 billion which are well below 5 year averages.

Furthermore, since 60% of the company’s revenues come from outside the US, sustained dollar strength has been a major headwind for McDonald’s as despite reporting growth in many markets with respect to volume, in dollar terms sales are still down which is all that matters to investors. Nevertheless, analysts are shrugging off negative earnings growth by being optimistically bullish on McDonald’s stock over the next few years. Can the stock continue to trade above its historic valuation for a considerable amount of time? Realistically McDonald’s stock should fall but the stock clearly has momentum and shorting even here could be very risky for a variety of reasons.