Thursday, September 9, 2010

How to Post Good Results in a Recession

Today, fast food giant McDonald's (MCD) announced that their U.S. sales metric was up 4.6% in August as consumers flocked to the Golden Arches to buy McDonald's new frappe and fruit smoothie lines. As an investor, this news interests me for two main reasons: 1). In July, McDonald's saw U.S. sales rise 5.7% so they are continuing to post great sales figures even in the face of extremely slow economic growth 2). Both consumers and investors are "buying what they know" when they purchase the new menu items at McDonald's, as well as shares of its stock.

McDonald's is a great example of a company that produces goods that are price inelastic - consumers will not change their buying habits when it comes to Big Macs, frappes and the like even though prices increase. These goods are seen as convenient and McDonald's has been tremendously successful at integrating their new line of McCafe items to compete with the likes of Starbucks and the other big coffee chains.

The old investing adage goes "buy what you know"; basically, this theory says that you should stick to investing in companies which make products that you both understand and use on a daily basis. It seem as if the recession led investors to do just that, as McDonald's is up 56.4% (excluding dividends) since the heart of the financial crisis in September 2007. On the other side, consumers are doing the same thing in devouring McDonald's new McCafe line and buying large numbers of hamburgers and french fries as today's U.S. sales numbers indicate.

No comments:

Post a Comment