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The Wendy’s Company (WEN), McDonald’s Corporation (MCD): Lock In Your Gains On This Fast-Food Stock — And Buy Its Rival

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It’s unusual to hear someone in the financial media suggest selling a stock — particularly one they previously recommended.

But knowing when to close a position at the right time is just as important as getting into the right trade at the right time. That’s why I’d prefer not to leave this loose end open.

If you stepped into a The Wendy’s Company (NASDAQ:WEN) position about a year ago on my recommendation, I think it’s time to lock in your 40% gain and use those proceeds to invest in McDonald’s Corporation (NYSE:MCD).

A little more than a year ago, I concluded that “based on the company’s plausible growth forecast, shares could be worth somewhere around $7 by the end of 2013 or mid-2014 — about 60% higher than current levels.” The stock actually hit $7 in late July and has since reached a high of $8.05.

But it’s time to lock in the gain.

Don’t misunderstand my intention. It’s not a pessimistic judgment of the company, and yes, the stock could move higher. But with a little more than a 60% gain to protect, any further upside potential just doesn’t justify the inherent pullback risk built into a 12-month 60% rally.

Perhaps the biggest concern is the valuation. The stock’s now priced at a frothy 33.8 times trailing earnings. That’s not considerably more expensive than how The Wendy’s Company (NASDAQ:WEN) shares were valued a year ago. But a year ago, valuation wasn’t the concern. The turnaround effort was poised to be the driving force behind the stock. The turnaround is a done deal, however, and with earnings growth projected to slow to 13% in 2014, it’s tough to imagine the market willing to pump up the premium beyond its already lofty levels.

While The Wendy’s Company (NASDAQ:WEN) has been red-hot this year, McDonald’s Corporation (NYSE:MCD) has been less than impressive. Shares are up for the year, but down 8% from April’s peak and still falling at a decent clip.

The recent news hasn’t been particularly encouraging, either. The world’s largest fast-food chain has missed earnings estimates in four of its past five quarters. To make matters worse, Subway recently announced it was aiming to open as many as 1,000 to restaurants in Europe next year, where McDonald’s Corporation (NYSE:MCD) is already struggling.

Given that, why would an investor want to jump into an apparent laggard? For the same reason that now’s the time to shed The Wendy’s Company (NASDAQ:WEN) — nothing lasts forever. Both stocks can (and have) stopped and turned on a dime, and McDonald’s Corporation (NYSE:MCD) is due for a rebound for a handful of reasons.

© McDonald’s
McDonald’s is making a push to keep as many units as possible open 24/7, and to serve breakfast after midnight.

One reason is simply that traders have unduly punished the stock. Earnings misses or not, the restaurateur is still on pace to boost earnings 4.4% this year and projected to increase the bottom line 8.6% next year. That’s in line with the growth rate the company has logged for years now. Point being, despite recent criticisms driven by unmet expectations, the company is still doing fine.

Another reason McDonald’s Corporation (NYSE:MCD) shares are poised to start climbing again is the company’s new push to keep as many units as possible open 24/7, and to serve breakfast after midnight. Investors weren’t particularly impressed when the plan was unveiled. But hungry consumers have responded favorably to the new hours of service and expanded menu. Less than half of McDonald’s 33,000 restaurants are open around the clock, but that figure should reach about 60% by 2016.

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