McDonald's Could Surprise

The recent drop in McDonald’s (MCD, $62.00, down $0.85) stock price may have provided us an opportunity to go long. If you’ll recall, the shares hit a high of $67 on August 11, the next trading day after the Olympic opening ceremonies, and has proceeded to slide since. It was a classic case of “buy the rumor, sell the news” type event.

Resistance for the stock was at $62 and it’s not surprising to see the stock come back down and test this level. The key will be if McDonald’s can hold firm right here. The company has seen its earnings estimates rise as Wall Street now sees earnings of $3.52 for 2008 and $3.79 for next year.

We should get a good feel on where McDonald’s is at with those numbers once we get the sales numbers for August. They should be coming out within the next seven to 10 days and I think there’s a chance the company tops Wall Street’s estimates in this area again. The company has warned of higher beef and chicken costs in the not so distant past but has managed those costs extremely well. This would be the only area of concern I have.

I looked at the September 65 calls (MCDIM, $0.35, down $0.15) and the October 65 calls (MCDJM, $1.15, down $0.22) and feel better going with the October call options. If McDonald’s can test it’s 52-week high of $67 before October 18 then these calls will double. The October calls will also allow us more time in case McDonald’s starts off with a bad week. Futures are pointing to a higher open this morning so McDonald’s could be strong out of the gate.

Rick Rouse
Rick@OptionsMentoring.com

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