As 2023 progresses, market dynamics present both opportunities and pitfalls for investors seeking to maximize their portfolios. Notably, several prominent stocks have garnered attention for their performance, among them McDonald’s and Charles Schwab. However, according to James Demmert, the chief investment officer at Main Street Research, favorable stock prices may be misleading, and now might be the perfect moment for investors to consider divesting. His insights, shared during a recent CNBC segment, provide the basis for evaluating potential selling strategies and alternative investment avenues.
McDonald’s: A Sell Signal Amidst Earnings Disappointment
McDonald’s has long been synonymous with fast food dominance. Recently, shares surged by 5% after the company released its fourth-quarter results—a move that seems positive on the surface. However, a deeper analysis reveals troubling signs beneath this temporary uptick. Demmert highlights that while the earnings met expectations, revenue figures were disappointing, primarily driven by a significant decline in same-store sales.
This discrepancy raises red flags for potential investors. Demmert articulates that despite the apparent strength in the stock’s performance, investors should heed the underlying weaknesses in earnings reports. “Those golden arches look good on the market today, but the report was awful. They missed what was already a low bar,” he observed. This situation presents a case for letting go of McDonald’s shares while they are buoyant, as the company now trades at a valuation of 23 times its earnings—a figure that suggests limited upside potential in an increasingly competitive fast-food landscape.
With emerging competitors like Cava capturing market share, the narrative around McDonald’s could shift. While a 7% gain year-to-date is commendable, the analysis indicates that now might be the opportune moment for investors to capitalize on recent stock performance and exit the position.
Similarly, the investment landscape is not as rosy for Charles Schwab. The stock recently experienced a decline of over 2% after TD Bank Group announced its decision to divest $1.5 billion worth of shares, equating to a 10.1% stake in the bank. Demmert emphasizes that this type of significant selling by a major shareholder creates uncertainty for public shareholders.
“Waking up to news that your largest stakeholder is selling shares can create a considerable overhang on the stock,” he stated, underscoring the potential impact on upward price movement. Though Schwab has initiated a stock buyback program, the anticipated pressure from this substantial sell-off could inhibit growth instances in the near term. Photo positive growth figures, with over 10% increase this year and 28% in the last 12 months, do not mitigate the risks tied to the stock’s performance amid shareholder activity. Demmert advises caution—while there may be potential for better entry prices in the future, the present situation warrants reconsideration for current investors.
In contrast to the sell recommendations for McDonald’s and Charles Schwab, Demmert points towards international markets as viable investment alternatives. He identifies SAP, a major player in the software industry, as a notable opportunity. In the context of the ongoing artificial intelligence wave, SAP stands out as a strong player, with profits surging by over 28% in the previous year.
Describing SAP as a second derivative play within the burgeoning AI landscape, Demmert articulates its similarity to other tech giants like Oracle and Salesforce—yet with a unique position that could offer investors substantial returns. The company has recently posted favorable results that surpassed expectations on both earnings and revenue lines, promoting confidence in its sustained growth trajectory. Given the current geopolitical climate, Demmert posits SAP as resilient against potential tariffs, making it an attractive foreign investment.
As investors navigate the complexities of current market conditions, the recommendations by James Demmert serve as a critical reminder to constantly evaluate stock holdings against underlying corporate performance and market trends. While certain stocks, like McDonald’s and Charles Schwab, may appear visually appealing due to short-term gains, the fundamental analyses suggest it may be prudent to assess selling positions in favor of strategic buys like SAP, especially as the tech-driven economy continues to evolve. Making informed decisions based on both qualitative insights and quantitative performance can empower investors to capitalize on emerging opportunities effectively.