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Why Ultra-Long Term Share Price Charts Work so Well

April 20, 2023

Investors often are over-preoccupied with making money fast and end up on a fool’s errand. At Quentinvest we focus on making money slowly and often end up making it fast.

Most people don’t look at the ultra long term charts that I like with each candlestick representing as much as a year and it is true that these charts don’t tell you much about what is going to happen over the next few days which is the timescale on which so many active investors operate.

This can be an advantage though because I suspect that the shorter the timescale the more likely it is that the chart will not work. Think about daytraders who expect to open and close a deal within the day and look at charts with each interval measured in hours or even minutes. Daytraders are the reason why over 75pc of IG customers lose money.

I can see why there is a sort of Holy Grail feeling to this sort of activity. You go into the stock market at the beginning of the day and come away at the end with a useful profit. It is similar to old style stock broking where a member of the stock exchange could deal commission free and would go on the floor of the exchange in the morning, do some trades, make some money and take the rest of the afternoon off after a heavy lunch.

Nice work if you can get it but it rarely works. My first job was in a stockbroker’s office. I started in the back office processing trades and quickly noticed that some of the partners of the firm were incredibly active traders doing literally dozens of deals every day.

We, and they, used to deal on account, where you had two weeks to open and close a trade before you needed to settle up which allowed people, me included, to go in for an orgy of speculation. It was that experience which convinced me that long-term investing in high quality growth shares is the way to go and I have never wavered from that belief. After a few weeks of trading on account I needed tranquillisers to help me sleep at night. I have never needed them since.

Long term charts help you see the wood for the trees.

This is a super long term chart of US fast casual dining business, Chipotle Mexican Grill. There have been three period of correction/ consolidation, which are clearly visible on the chart. The latest one is the strongest. Instead of falling the shares have been trading broadly sideways against the background of a severe bear market in some parts of the US stock market. We also have a recent Coppock buy signal suggesting that the breakout when it comes will be higher.

Now we have another clue from looking at a chart where each candlestick represents three months.

On this chart we have a golden cross by the moving averages with the shorter period blue line (5 x 3m) rising up through a rising longer period red line (9 x 3m). These buy signals are rare. This is the fifth such signal on this chart over a 17 year period. All the previous ones have worked very well.

Chipotle is due to report soon when we will learn more about what is happening. Quarterly reports often usher in a period of short term volatility but longer term this is just noise so I don’t pay much attention unless something really unexpected happens.

As with so many other things the US is incredible at creating restaurant concepts that run and run and Chipotle is another amazing example.

The business had a problem period in the latter part of the second decade of the millennium but in 2020 they did a clever thing and hired a man called Brian Nicoll, previously CEO of Taco Bell, a subsidiary of Yum! Brands. He proved to be a breath of fresh air and revitalised the business which has been on fire ever since he arrived.

New CEO, Brian Nicoll, transforms Chipotle Mexican Grill

There is a lot going on at Chipotle which is adding new restaurants at a furious rate but we can cut to the chase and quote the outlook statement.

We have a long growth runway ahead with the ability to more than double our restaurant count, grow AUVs [average unit volumes] beyond $3m and expand margins. I believe we have the right team and strategy in place, and we will remain focused on meeting the standards of excellence that make Chipotle, Chipotle.

4 2022, 9 February 2023

Apparently Nicoll is on record as expecting AUV, sales per restaurant, to reach $4m and with more restaurants coming on stream almost on a daily basis this is a powerful growth engine.

Quentinvest verdict: Great chart, great fundamentals, great buy.

World’s biggest fast food business powers ahead

You guessed it, McDonalds, the company which introduced the world to the Big Mac. I have a prejudice against McDonalds on the presumption that they are almost single handedly responsible for spreading obesity around the world but I wonder if that is really fair. When I look at a Big Mac, it doesn’t look so unhealthy, beef, cheese and tomatoes in a bun and even the fries look OK. Are they so unhealthy and they are certainly popular and I suppose tasty. In fact I am thinking of overcoming my outrageous snobbery and trying some?

The stats are amazing.

McDonald’s is the world’s largest fast food restaurant chain, serving over 69 million customers daily in over 100 countries in more than 40,000 outlets as of 2021.

Global data , 2021

The chart is strong. This has been a good stock to own for a very long time. The story is not exactly new but more of the same would not be bad and global inflation may end up as good news for a business like this which ultimately will be able to pass higher costs on in higher prices. Nobody can beat a behemoth like this on price and higher revenue at same old margins would deliver plenty of growth.

95pc of the restaurants are owned by independent operators which makes McDonalds more like a platform, an IP (intellectual property) business not so dissimilar to other success stories like Apple and Coca-Cola, which long ago floated off its bottling and distribution operations as separate businesses.

The company is embracing the digitaL world.

Through our focus on digital, we are transforming from a brand that serves billions and billions all the same way to one that serves each of our billions of customers uniquely as individuals with customized products, offers, and experiences. By doing this, we strengthen our customers love and loyalty for McDonald’s. These investments are paying off. In the fourth quarter, digital represented over 35pc of system-wide sales in our top six markets. 

In 2022, the McDonald’s App was downloaded over 40m times in the U.S., greater than the total downloads of the 2nd, 3rd and 4th brands combined. Through our loyalty program, which we’ve expanded over 50 markets and counting, customers are feeling more connected to McDonald’s, which in turn increases visits and frequency.

Q4 2022, 31 January 2023

McDonalds is a sensationally profitable business.

For the full year, adjusted operating margin was nearly 45pc, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we’ve discussed, top line results generated restaurant margin dollars of over 13bn for the year, an increase of nearly 1.5bn in constant currency. Franchise restaurants, which now represent 95pc of our global portfolio, contributed nearly 90pc of our total restaurant margins, reflecting the stability of our business model.

Q4 2022, 31 January 2023

It is interesting to see how McDonalds, the company, perceives itself.

In my travels throughout our global system, I sometimes like to ask our people, what exactly does McDonald’s Corporation sell? As you might imagine, this usually prompts a lot of puzzled looks, and a brave soul or two will raise their hand and say, “Well, we sell great-tasting food or we sell burgers and fries.” Of course, that’s technically true. But as a largely franchised business, ultimately, McDonald’s Corporation is in the business of selling a brand so that others can sell burgers and fries. And while some may see it as a trivial distinction, I see it as fundamental. As goes the McDonald’s brand, so goes the health and economic value of our company and system.

Q4 2022, 31 January 2023

What does McDonalds do with all the cash it generates. It looks after shareholders.

Sept 23 (Reuters) – McDonald’s Corp (MCD.N) said on Thursday it would restart share buybacks and also increased its quarterly dividend by 7pc, as the world’s largest fast food chain recovers from the impact of the COVID-19 pandemic.

McDonald’s had suspended its $15bn buyback program early last year as the burger chain looked to conserve cash in order to navigate through the COVID-19 health crisis that had forced many of its restaurants to close their doors to diners.

Reuters, 23 September 2022

We get so blasé about big numbers but $15bn buys an awful lot of shares and it won’t be the last buyback programme from MCD.

Strategy

I could choose more restaurant shares. The whole sector is looking strong but I think two good ones is enough.

Share recommendations

Chipotle Mexican Grill. CMG Buy @ $1805

Mcdonalds. MCD. Buy @ $290

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