There’s no doubt that while McDonald’s Corporation (NYSE:MCD) is an American icon, it is in trouble. While the fast-food behemoth is working on turning around its fortunes by being more efficient and trimming its extensive menu, Trian Partners’ Nelson Peltz and Pershing Square’s Bill Ackman say that the road to recovery is still a long and hard one for McDonald’s. In the first quarter of the year, the burger-and-fries giant missed earnings expectations of $1.06 per share, reporting EPS of $1.01 per share while marking yet another quarter of declining global same-store sales, which fell by 2.3% in that period. In May, the firm said that there was a 0.3% fall in global comparable sales driven by a 2.2% decline in the U.S. and a 3.2% drop in the Asia-Pacific, Middle East, and Africa regions.
Peltz, at an investment conference in New York on Wednesday, said that he would be interested in helping the golden arches reclaim shine again; if only he wasn’t a competitor that is. Peltz is the chairman of Wendys Co (NASDAQ:WEN).
Follow Nelson Peltz's Trian Partners
The billionaire activist investor – who, at the same conference, disclosed that Trian has two new big activist targets accounting for a third of the firm’s entire portfolio – told the crowd that McDonald’s Corporation (NYSE:MCD)’s mindset should be “turned upside down”. He added, however, that he does not know whether the company has the stomach to do it or whether shareholders will be patient enough to see the giant pull through the years necessary to make it happen.
Fellow billionaire activist Bill Ackman agrees with this sentiment, as he said during the conference that he actually suggested about a decade ago that McDonald’s Corporation (NYSE:MCD) should franchise most of its locations. The fast- food giant did try to go with Ackman’s plan, but not fast enough it seems. The billionaire and his hedge fund Pershing Square found a more cooperative partner in franchising most of its stores in Burger King. Restaurant Brands International Inc (NYSE:QSR), the parent of Burger King, saw its share price increase by 15.58% in the past year. Burger King, according to Ackman, was in a “much worse place” than McDonald’s is currently in. He added that “The store base was a disaster, they had something like 13 CEOs in 25 years.”
Follow Bill Ackman's Pershing Square
Over the last 12 months, McDonald’s stock has declined by 1.5% while other rivals such as Yum! Brands, Inc. (NYSE:YUM) and Wendys have grown by 7.61% and 26.84%, respectively. Newcomers like Chipotle Mexican Grill, Inc. (NYSE:CMG) are also leaving McDonald’s in the dust. In the past year, Chipotle’s stock has grown by 10.8%. In the last five year’s, Chipotle’s stock has soared by 371.47% while McDonald’s saw a relatively measly 42.73% share price climb. Chipotle is one of the darlings of the fast-casual dining restaurants group, which have attracted more and more people away from traditional fast-food giants like McDonald’s by offering menu items usually perceived as more healthy to an ever growing, health-conscious market.
Following activist funds like Trian Partners and Pershing Square is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. Funds like Trian Partners and Pershing Square can simply create their own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 34 months since our small-cap strategy was launched it has returned over 139% and beaten the S&P 500 ETF (SPY) by more than 80 percentage points (read more details).
It seems, however, that other hedge fund managers are betting on McDonald’s Corporation (NYSE:MCD). Among the funds Insider Monkey tracks, the total value of holdings of those who have stakes in the company increased by 32.62% quarter-over-quarter by March 31 to $6.83 billion. Another bullish sign is that 89 among the over 700 hedge funds we track had long positions in McDonald’s by the end of the first quarter, up from 75 from the end of the previous quarter. Mason Hawkins’ Southeastern Asset Management owned the largest position in McDonald’s Corporation (NYSE:MCD) among funds we track at the end of March, with 10.85 million shares worth about $1.06 billion. Highfields Capital Management, led by Jonathon Jacobson, followed with a $995.56 million stake comprised of 9.81 million shares. Highfields Capital Management also initiated a massive call position in McDonald’s Corporation (NYSE:MCD) worth $417.3 million in the first quarter. Larry Robbins‘ Glenview Capital also initiated a $282.7 million position during the quarter, buying 2.9 million shares.
Disclosure: None
