In 2023, the stock market has experienced considerable fluctuations, prompting investors to reassess their portfolios. Certain companies have shone brightly, such as McDonald’s and Charles Schwab, which have posted impressive gains over the past year. However, a closer look at their recent performances reveals potential storm clouds on the horizon, suggesting it may be a judicious moment to consider selling these stocks. James Demmert, the chief investment officer of Main Street Research, has provided critical insights into the state of these investments and the potential for emerging opportunities.
McDonald’s has certainly been a pillar of strength within the fast-food sector, with its stock seeing a nearly 7% increase year-to-date. On the surface, the shares jumped by 5% following the release of fourth-quarter results, which at first glance seem promising. However, Demmert’s analysis reveals that the underlying earnings report may not warrant such enthusiasm. While the earnings were generally in line with consensus estimates, revenue figures were disappointing, primarily due to a significant decline in same-store sales.
Demmert starkly remarks, “Those golden arches look good on the market today, but the report was awful. They missed what was already a low bar.” This statement encapsulates the investor’s sentiment that while McDonald’s stock may be appearing robust now, it is primarily an illusion driven by poor earnings performance. With the stock trading at 23 times earnings and facing stiff competition from modern food brands, such as Cava, the question arises whether McDonald’s trajectory will continue to rise or if it is peaking. The recent gains may therefore represent an optimal opportunity for investors to exit, mitigating potential risks that come with an increasingly competitive market landscape.
The situation for Charles Schwab appears equally precarious. The stock’s recent decline of more than 2%—attributed to TD Bank Group’s decision to divest its substantial stake—has created a notable overhang for the company. The announcement of such a significant sell-off raises concerns among public shareholders and creates uncertainty regarding the stability of Schwab’s stock moving forward. Demmert warns, “You don’t want to wake up as a public shareholder or company and find out that your largest stakeholder is selling shares.”
Despite Schwab’s assertion that it plans to buy back shares, the looming presence of a major shareholder divesting will likely restrain any upward momentum in the stock’s performance. Even with a year-to-date rise of nearly 10% and a remarkable 28% increase over the last twelve months, the pressure from the sale signifies a challenging environment ahead. Investors might be wise to contemplate a sale to avoid the fallout from this situation, particularly as concerns about market volatility grow.
Amidst the uncertainty surrounding McDonald’s and Schwab, investors may find promising prospects in international markets. Demmert highlights SAP, a software giant, as a noteworthy buy. SAP is uniquely positioned to benefit from the rise of artificial intelligence, which Demmert describes as “a great way to play the artificial intelligence trend.” He draws fascinating parallels between SAP and other tech powerhouses, suggesting that it holds substantial potential as companies increasingly look towards AI-driven solutions.
SAP’s profits surged by over 28% in the last year, signifying strong operational performance. The recent earnings beat illustrates its capacity to thrive even in fluctuating market conditions. Furthermore, Demmert points out the company’s relative immunity to geopolitical tensions, specifically Trump’s tariffs, adding another layer of attractiveness to this foreign investment.
Beyond just financial returns, investing in SAP could provide an entry point into a tech-led bull market that is beginning to take shape, especially as businesses make strides toward integrating AI into their operations. It is an opportune time for investors to refocus their strategies, pivoting away from transient reports of companies like McDonald’s and Schwab, and directing their attention toward promising names like SAP.
While McDonald’s and Schwab have exhibited strong performance metrics, current indicators suggest it may be prudent to part ways with these assets. In contrast, SAP presents a viable route for those looking to capitalize on technological advancements. By re-evaluating investment choices with a critical lens, investors can better navigate these turbulent times.