Thursday, March 8, 2012
Buy on the dips, right? That's what they always say, yet it's emotionally and philosophically difficult to do. When a stock is falling in price the natural reaction is to ask oneself "what's wrong here?". That's understandable. What I try to do is instead of asking myself that question, I ask myself "what is everyone else getting wrong here?". Instead of picking a stock apart and finding all the right reasons for the price falling, I look for all the right reasons to purchase the stock and take advantage of other people's fear. Be greedy when others are fearful and fearful when others are greedy. The great Warren Buffett is wise, indeed. Well, today one of my holdings dipped and I purchased.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 12 shares of McDonald's Corporation (MCD) on 3/8/12 for $96.91 per share. I don't think I need to introduce the McDonald's business plan or exactly what they do. I'll instead leave the qualitative qualities out of the discussion today. It's an extremely dominant business, and even being as frugal as I am I do occasionally indulge in their products. The frappe's are delicious! I'll leave it at that.
MCD isn't exactly a steal at current prices, but I think it's a fair price to pay for a quality company. I've been holding my relatively small MCD position as it rose above $100 per share as I never felt it was grossly overvalued, but I didn't see much of an opportunity to add to my existing 14 shares. Today's dip of over 3% was due to a slight sales growth miss based on analysts expectations. I'll take that dip as my cue. I received an entry yield on my price of 2.89%, and this purchase will add $33.60 to my annual dividend total based on the current payout of $0.70 per share per quarter. The current P/E ratio is a hefty 18.40, which is fairly strong but probably pretty fair for the growth that MCD still has ahead of it. The balance sheet is fairly strong, with a debt/equity ratio of 0.8 and the 5-year dividend growth rate is a whopping 20.4%, though I do expect that to slow to high single digits for the foreseeable future. This purchase brings my total MCD holdings to 26 shares.
Best of all, MCD has underperformed the S&P 500 this year, going -3.35% YTD while the S&P 500 is up 8.60% on the year. That difference is very attractive to me, especially after the strong 2011 MCD had. Again, MCD isn't a steal at current prices, but I think today's dip offers the long-term investor a chance to initiate a small position or add to an existing one. Certainly not a dip to back the truck up on, and that's why I didn't go crazy with it.
I still have enough capital to make one more purchase this month and will wait a little bit for another dip on something attractive. I planned on making larger purchases this month after my strong savings rate in February, but unfortunately I had a higher than planned tax bill that required some of my capital.
I still own 25 positions, as I was already long MCD.
Some analyst opinions on MCD:
*Morningstar currently rates MCD as a 3/5 star valuation.
*S&P currently rates MCD as a 5/5 star Strong Buy.
I'll update my Freedom Fund in early April to reflect my recent purchase.
What are you buying?
Thanks for reading.