A Bond Unlike Any Other
Bid and Tonic 6, McDonald's edition
Greetings from the northernmost McDonald’s in Japan! Did I drive for 7 hours along the coast and through zero-visibility snowstorms just to get a Big Mac in Hokkaido? You bet I did.
Perhaps my most “presidential” quality is that I adore McDonald’s. I don’t think there’s a company that has done the perishable supply chain as well as they have on even remotely the scale they standardized across the globe. Just look at what happened to Chipotle, which is an exceptionally well-run company in its own right.
In that post, I noted that
If Bill Ackman can make over 1.5 billion dollars on a trade cause he likes burritos, we do not need to be solving partial derivatives and interpreting quant signals like they’re star positions indicating Chipotle is in retrograde to make money on a trade. Instead, we can go find where the liquidity needs to be, and provide it, and maybe we do it because we like the stock…
At the end of the day, good product = good revenue growth…
I know big investors want to look for revenue growth. Everyone wants things to make sense and have easy-to-digest reasons rather than having to divine market astrology. So, I go trade what they want, because I like the stock, and the investment thesis makes sense
2024 was a good reminder of exactly how sticky McDonald’s is in the American conscious. Indeed, it was the Year of McDonald’s
At the end of October, there was the viral, and controversial, Trump campaign stop, where he “worked” for 30 minutes at a McDonald’s in Pennsylvania. Then, this week, there was the news that Luigi Mangione, the alleged assassin of UnitedHealthcare CEO Brian Thompson, was caught in a McDonald’s—also, coincidentally, in Pennsylvania—because he was spotted by a group of morning regulars and employees…
but that doesn’t highlight exactly how I think about the stock (which I was long from July to August, and am currently long — disclaimer), in that the most often complaints I read about inflation were contextualized around eggs and McDonald’s.
First of all, though I’m no Don Gorske (who is in surprisingly good health),
Gorske claims that after getting his first car, the first place he went to was the McDonald's on Military Road in his hometown of Fond du Lac on May 17, 1972.[4][5] He purchased and ate three Big Macs at lunchtime. He returned two more times to consume nine Big Macs the same day he discovered the burger. He further claims to have eaten 265 Big Macs the following month, an average of 8.5 Big Macs daily…At first, Don kept all the boxes of Big Macs he ate in the back of his car. In addition, he has a statue of Ronald McDonald in his yard. Gorske had a single Burger King Whopper sandwich in 1984 and never ate one again. Gorske tried the Whopper after his friend bet him $5 to do so, later spending the winnings on Big Macs.
there’s the obvious fact that you should order through the app, always, because the menu prices are inflated to ease the liquidity consumed by delivery orders:
All orders are not created equal. A family sitting down on a road trip is more profitable than the family ordering through a drive-thru (packaging costs are not negligible at scale AT ALL) is more profitable than a blogger ordering through the native app is more profitable than a delivery order where 20-30% goes to the 3rd-party-app. But to keep the delivery apps happy, they need their cut. If you price those orders so that your margins are preserved, they might cut you off from their app network — which you do need when demand is slow/dead in-store. McDonald’s has a pretty workaround to this — their market power is so high that they raise their sticker menu price while their app contains regular discounts that reduce the price of offerings significantly. Then they list their food on delivery apps at sticker. While there might be kvetching from people who look at the menu without looking at the app, I promise you, it’s ridiculous to not be ordering from their app.
As a result, MCD is maybe the perfect blend of “attention economy” and “revenue story” that I could possibly dream of — when the market environment is uncertain, you tend to want to hold things that you know aren’t going anywhere, and how could a company with 40,000 locations disappear overnight? Accordingly, after the blatant hitjob “investigation” after Donald McDonald’s photo op into pricing and an E.coli “outbreak”, I decided to “buy the dip”.
I have spent a lot of time in McDonald’s over the years, whether it’s off the highway while driving through the middle of nowhere, Japan, India, a multitude of European countries, and countless airports. And a consistent observation of mine is that hanging out in a bar is for alcoholics, New Yorkers, and Nicholas Cage, coffee shops are for Macbook owners, and McDonald’s is for, well, just about everyone else. As I take a gander at who else is wiling away the time in this Wakkanai McDonald’s, I see a bunch of elderly men reading the newspaper and drinking black coffee, which is the same sight you’ll see if you walk into any smaller town McDonald’s stateside. Earlier this month, when I was in an old haunt in Waseda after a night at one of my favorite record bars, I wandered upstairs with a teriyaki chicken sandwich and took note of a college-ish aged kid in a SpaceX shirt sipping a Melon Fanta and a girl with headphones drawing in a sketchbook, which was the same sight I saw in Malibu when I stopped at the seaside McDonald’s after attending game 1 of the World Series. Indeed, McDonald’s is possibly the most ubiquitous, standardized “third space” in the world as long as you’re not walking into a mess of a downtown location, as it perhaps is the origin story of the condescension the Platinum/Chase Sapphire Reserve class holds towards it, which is somewhat understandable having stumbled into the infamous West 3rd St McDonald’s more times than I’d care to admit
We're talking, of course, about the McDonald's off West Third Street and Sixth Avenue, an enter-at-your-own-risk emporium of fried food, brazen rodents, vintage firearms and not a single sober soul in sight.
With photos of its shuttered storefront making the social-media rounds, the seminal location has apparently closed, another coronavirus restaurant casualty
There’s a political point to be made about McDonald’s, of course, given the role it played on the campaign trail, which has been written about more times than I care to count. But what’s more interesting to me is the level of saturation. An attention phenomenon can only expand if there is a notable sum of people unaware of it, just like the revenue of a company can only grow if there are new customers to be acquired or consumption habits to modify. And, well, it’s not KO, which as about as saturated a consumer product as I think is humanly possible, but MCD is kinda close:
Nearly nine out of 10 American households visited the chain at least once over the last year, according to the data firm Numerator.
The firm said that 87% of U.S. households visited one of the chain’s locations at least once in the 12 months ended June 30, the highest penetration of any restaurant chain.
The average McDonald’s customer visited 54 times during that period and spent $461
At this point, any millennial is generally aware that Supersize Me, the infamous documentary shown in class while I was in grade school, was slanted to blame McDonald’s for the health failures of a severe alcoholic. (I prefer the whiskey version, of course — RIP Trevor Moore.)
Every stock, whether “growth”, “value”, or any other thematic label, needs a revenue story. (The zero-revenue phenomenon of ZIRP days past has moved back to private markets and memecoins, of course.) At the time of their E.coli crisis, Chipotle was nowhere near the behemoth it is today — meanwhile, McDonald’s revenue is slightly lower than it was 10 years ago. Obviously, a new product release is not going to warp the perception of the company and change its dynamics. So why would you hold such a stock in the first place?
Well, because inflation, beyond making the sticker price of a Happy Meal skyrocket, also burns the money sitting in your account. Though MCD is down ~2% YTD at time of writing, it still moves, having done ~15% in the past 6 months. In my head, I have replaced bonds with “saturated stocks”. (As Paul Tudor Jones and I stated,
Look, you can cite whatever numbers you want, I am convinced we are not getting “true” 2% inflation again. Don’t just take it from me, Paul Tudor Jones arrived at pretty much the exact same conclusion.
There are essentially three considerations when owning a stock in times of uncertainty:
a) am I going to outpace the money market fund rate (the base case to keep up with inflation)
b) will any gain be worth the potential drawdown
c) is the stock correlated with the broader market or not?
Beyond just looking at beta, this is the core idea behind the four-stock portfolio method I wrote about ages ago:
The insight of this style of portfolio construction is that I disregard the idea that there is some novel insight to be gained in researching individual companies or that allocating capital to public markets is supposed to hockey-stick my net worth quickly. There are better venues for those goals…
..striking a balance between generating an (ideally inflation-beating) return versus avoiding the full drawdowns of the overall market is a much more worthy goal. Of course, based on your risk tolerance/overall time horizon, you can prioritize the return versus the drawdown avoidance accordingly.
You just don’t want to hold bonds in a sticky inflation environment. Think about the effect of owing a denominated amount of money that inflates away over time — in “real dollars”, the debt is worth less and less. So why would you want to have bonds, rather than divergence in return profile?
“Saturation stocks” can certainly enter an overvaluation period, but as long as the revenue is stable and predictable, there’s no reason to dump it, regardless of what P/E or Schiller or whatever doomsayer metric of choice you like to look at to scare yourself says. While market certainty is lacking — as we all are concerned about, given the absolute meltdown Powell caused today (I’m finishing up writing this post after the trading day, which I’ll address later) — I think these stocks are the new “safe haven”. McDonald’s isn’t going to bagel — after all, the muffins are way more popular — and the concept of “safe” asset flight has completely been inverted. Would you feel comfortable holding JPY or treasuries at the moment? I certainly wouldn’t. Inflationary environments help the saturation stocks as, well, the number does go up. Over time, if you look at the chart, it’s pretty clear that high after high was set as prices got higher and higher. The price complaints, in a sense, are bullish!
I’m not entirely sure where things are going just yet, but I also prefer my stocks to not move around 10% day to day like a TSLA or a COIN all the time. Because, after all, that’s what McDonald’s offers to investors and Olympians alike — they know exactly what they’re going to get whether in Athens or Atlanta, and I know I’m not going to get a very unpleasant red number in my brokerage account if I decide to log off for a few days. I don’t need to understand yield curves or contango. And, of course, I can reinvest my dividends in Big Macs using the Gorske strategy, a kind of perpetual motion machine in and of itself. However, I’ll hold the fries.
If, like Vincent Vega, you don’t walk into Burger King, feel free to forward this post to another Big Mac enthusiast, which is clearly superior to the QPC.