Band: What's up at Big Mac?

12/27/2002 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

"Stocks are trapped between the August highs (roughly 960 on the S&P index) and the October lows (775)," says Richard Band, legendary contrary investor and editor of Profitable Investing. "A momentum breakout is due soon. My best guess is that it will be on the upside, but I also respect the deflationary forces we're grappling with. This is a time for calculated risk-taking, not go-for-broke bets." Here's Band's latest "calculated risk".

"McDonald's (MCD  NYSE) recently dumped a basketful of scalding fries on investors, cutting its fourth-quarter earnings estimate for the second time. Including $390 million of special charges, Mickey D's will report its first quarterly loss since going public 37 years ago. This is no frolic in Ronald McDonald's funhouse. However, the outlook isn't quite as sour as it may appear. MCD has just installed a new management team with excellent credentials and a mandate to do whatever it takes to turn the shop around. MCD's board can read the stock price as well as you or I. A year ago, they were concerned. Today, they're desperate.

"My guess is that new chairman Jim Cantalupo is throwing the kitchen sink, and any other bad assets he can find, into this quarter's write-offs. While it will take time to spiff up the operations of an empire as far flung as McDonald's, I think we'll begin to see earnings improvement within the next quarter or two. Trading at 13 times this year's operating profits, the stock is the cheapest it has been since 1991. Value investors I respect deeply, including the folks at Clipper Fund and Dodge & Cox, have been snapping up MCD shares. I advise you to do the same at $19 or less. From today's levels, I think you'll double your money over the next two or three years."

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