After a rough couple of months, shares of fast food giant are quietly becoming one of the more interesting contrarian setups in the market. On the surface, however, it might be hard to spot. The stock is back trading at the same levels it was at in 2022; its price-to-earnings (P/E) ratio has compressed to its lowest level in nearly two years, and, technically speaking, its shares are oversold.
That’s a remarkable position for a company that’s been delivering record revenue and record earnings per share in recent quarters. Even more interestingly, McDonald’s relative strength index (RSI) fell to 25 in mid-May, an extreme reading that has historically coincided with a low in the stock.
Investors are clearly worried about slowing consumer spending, weaker traffic trends, and mounting pressure across the broader restaurant sector. The question now is whether the market has overreacted to McDonald’s specifically and, in doing so, has created a compelling long-term buying opportunity.
Why McDonald’s Has Fallen So Hard
Though the stock was setting record highs as recently as February, several reasons explain why it’s since fallen as much as 20%. The broader consumer environment, for example, has become more difficult, particularly for lower-income families, a key target market for McDonald’s. As have risen since early March, consumers are feeling the pressure of some of the highest inflation readings in years and are spending less.
Fast food companies across the board are aware of this shift, and investors are increasingly worried that restaurant traffic could remain under pressure through the rest of the year. That concern has weighed heavily on McDonald’s shares.
The market has also started questioning whether the company’s best growth years are already behind it, especially in a world where investors seem to only care about artificial intelligence (AI) or related tech stocks. McDonald’s is about as brick-and-mortar as they come, so perhaps it’s no surprise that the stock has been drifting lower while AI stocks have been surging.
The Fundamentals Still Look Surprisingly Strong
However, the selloff appears increasingly disconnected from the business’s underlying fundamentals. That is what makes the setup so interesting. Despite the weak price action on the chart, McDonald’s continues to perform like one of the strongest consumer businesses in the world.
The company generates substantial cash flow, maintains industry-leading operating margins, and benefits from one of the most powerful franchise models ever built. Its scale, pricing power, and global brand recognition remain almost impossible for competitors to match, let alone replicate.
Importantly, management isn’t acting like the company is preparing for a long-term dip. As part of last week’s earnings report, the company reaffirmed plans to expand to roughly 50,000 restaurants globally by the end of 2027. That’s not exactly the kind of behavior you’d expect from a company expecting structural weakness. If anything, it’s a move by management that signals confidence in its outlook and growth expectations.
That confidence is also showing up financially. Even with slowing consumer conditions, McDonald’s is, from a trailing 12-month perspective, delivering record numbers for revenue and earnings per share and comfortably beating analyst expectations.
Multiple Signals Suggest This Could Be the Bottom
That hasn’t been enough to stop investors from selling the stock en masse in recent weeks, but it does mean the company’s valuation has been firmly reset.
Based on a fresh P/E ratio of 23, McDonald’s is currently trading at one of its lowest valuation levels in nearly two years. Combined with the fact that the stock’s back trading at 2022 levels, you can’t help but feel there’s an opportunity here for investors to buy into one of the world’s strongest consumer franchises at a serious discount.
This thesis is supported by the technical setup, with the depressed RSI suggesting the stock is in externally oversold territory. What makes this all the more compelling is that the last time McDonald’s RSI was this low, it ultimately marked a long-term bottom for shares.
The final piece of the puzzle from the bulls’ perspective is the recent analyst commentary, which is overwhelmingly bullish. This week alone has seen JPMorgan Chase reiterate its Overweight rating and $305 price target, while last week, Evercore and BTIG did the same, with price targets of $350 and $370, respectively.
Considering McDonald’s is currently trading at just $275, that’s a solid 35% in targeted upside—not bad for a stock that’s back trading at 2022 levels, is extremely oversold technically, while still executing extremely well. Don’t be surprised if the market starts catching onto this opportunity pretty quickly.
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