Motley Fool: Profitable Arches

If you’re looking for growth and income in your next investment, consider McDonald’s (NYSE: MCD). It’s a fast-food giant, yes, with a market value recently near $155 billion. But it’s also very much a real estate company that happens to rent exclusively to fast-food franchisees. Of the 39,096 McDonald’s outlets in the world as of the end of September, only 2,658 were actually owned by the company. The other 36,438 were owned by franchisees.

That’s a profitable business model: Franchise fees, rent payments on restaurant buildings and the sale of supplies required to operate a McDonald’s restaurant generate fatter profit margins than actually owning and operating a franchise. Still, McDonald’s isn’t immune to the impact of coronavirus-related shutdowns; its top line tumbled 30% year over year for the quarter ending in June.

The picture has brightened over the past quarter, though, as consumers flocked back when the pandemic looked like it was starting to ease. By that time, McDonald’s had had enough time to adapt, focusing on a “3 Ds” strategy: digital orders, deliveries and drive-thrus.

With vaccines around the corner, the company is even better positioned to return to its pre-pandemic growth pace, and recent marketing efforts such as celebrity “famous orders” are generating more sales. The clincher: McDonald’s dividend recently yielded almost 2.5%, and it has increased that payout annually for 44 straight years.

Ask the Fool

Q: What does it mean that Target’s “volume” is 3.56 million? – P.T., Allentown, Pennsylvania

A: That figure reflects the number of shares of Target’s stock that traded hands, averaged over some period such as a day or a month. When you asked, 3.56 million was the average number of shares traded per day over the past 30 days.

Volume can vary widely between companies, in part because they have different numbers of shares outstanding. Target recently had about 500 million shares, while Walmart, with a corresponding volume figure of 6.1 million, had about 2.8 billion shares.

Online data sources such as Finance.Yahoo.com often list recent volume and average volume. If a stock’s recent volume is much higher than its average, then something is probably happening to attract attention to the stock, such as good or bad news for the company.

Q: What are the marks of the most promising stocks, and are they best found in a booming market? – T.C., Anaheim, California

A: You’re more likely to find stock bargains when the market is down and the economy is challenged. Many stocks can be overpriced in booming economies.

But pay less attention to the overall economy and more to each company you’re evaluating. For best results in your investing, you should understand the company well and have great confidence in its competitive strength and its future. Read its annual and quarterly reports, reviewing factors such as debt load, cash level, profit margins, free cash flow, and growth rates of revenue and earnings.

Superinvestor Warren Buffett has explained that he looks for “(1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively.” That’s great advice.

My dumbest investment

My dumbest investment happened about 15 years ago, when I bought into the hype of an internet campaign hyping a penny stock involved in the Texas oil business. I put $1,500 into it at $0.43 per share, getting almost 3,500 shares, and watched it climb immediately to $0.95 cents per share, thanks to the online promotions and buyers like me falling for it.

Of course, I decided to let it roll and see if I would end up turning my $1,500 into millions while this unknown company became the next Microsoft. And, of course, the company’s underlying fundamentals were anything but sound; it was headed for bankruptcy.

That stock reached a high of $0.97 per share, then sank like the Titanic, going down by the bow. It sank so fast that I couldn’t get my money out.

I still have shares that I can’t get rid of; the last time I looked, they were worth $0.001. I was one dumb investor. – R., online

The Fool responds: You were just naive, and fell for the classic pump-and-dump penny stock scam. That involves promoters hyping a small company’s supposed great promise and selling their shares after gullible investors bought in.

Steer clear of penny stocks – those trading for less than about $5 apiece. They are likely to be very volatile, and often wipe out many investors when they crash.