Go on the offensive: Short McDonalds (MCD)
Today's Financial News - Posted September 18, 2008
In an uncertain market, investors are flocking to so-called defensive plays like McDonalds (NYSE:MCD). Because of this, the fast-food behemoth is one of the few stocks with positive action over the past few days. When investors no longer need safety, however, they are going to flee this stock in droves. Take a short position now and profit when the market goes on the offensive.
By Andrew Snyder
Baltimore (TFN) – I have had a few more cups of coffee than normal today, so I am going to do something a bit out of the ordinary.
First, I am going to prove to you that all it takes to be a good investor is to be a good fisherman – yes, I said fisherman. And then I am going to prove my theory by leading you to a great options investment. You in for it?
Let me show you what I am talking about. I have fished all over the continent from Delaware to Alaska and from Colorado to Belize. Along the way, I learned one very important lesson. It does not take a genius to hook a fish. Just turn on any outdoors TV channel. You will see what I mean.
I have also been all over the investing world. I started as a financial advisor, quickly moved to the world of equities, and even moved into the options and bonds specialties. Here too, I learned a very important lesson. It does not take a genius to make money. Again, back to the TV.
I spent eight months of my life working as a fishing guide in Alaska. The job was eerily similar to what I am used to in the financial world. Every morning, I would crawl out of bed, ponder the data from the day before, and use the knowledge I gained through years of experience to create a game plan for the day.
Just the facts ma’am
In fishing, I considered things like where the fish were feeding, where they were headed, and if they would follow their normal patterns. Sometimes the fish acted the way they are supposed to. Most of the time they didn’t.
Sound like investing yet?
After figuring out all the details and variables, I would write down a plan for the day and stick with it. Often, my plan would cause me to be the only angler fishing in an area. And just as often, I would bring home the catch of the day.
Just like investors, anglers have an incredible herding instinct. We see an angler fishing a spot and immediately think he knows something we don’t. So we join him. Then the next guy casts a line. Then the next guy.
The herd continues to grow until somebody finally says, “Forget this. I am moving on.” Eventually, the group will pick up and follow.
Sounds an awful lot like the investing community.
Be a leader, not a follower
Right now, the herd is fleeing towards safety. Gold, bonds, pharmaceuticals, and large retailers are getting more than their share of attention. The group casting its bait into these stocks is growing larger by the minute.
Fortunately for you, they will eventually realize the fish are not biting and will move on. That is where the investment opportunity I promised you comes into play.
Take a look at McDonalds Corp. (NYSE:MCD). You cannot open the newspaper or turn on the television without seeing or hearing about this fast-food behemoth. It is the investment du jour.
“The market is fleeing to safety,” they say. “When consumers can no longer afford a fancy restaurant, they eat at McDonald’s.”
The assumption is correct. That is why investors are flocking to this so-called defense play.
It sounds great right now. But what happens when the market reaches a bottom and we no longer need safety? You know the answer. Investors are going to run to the next hot spot and share price will sink.
That is why I recommend using McDonalds, not as a defensive position, but as an options play. When it starts to sink, the company’s put options are going to soar in value.
Take a look at the McDonalds December 62.50 Puts (MCDXZ.X). Right now, they are very close to being in the money. When the herd decides it no longer wants to fish this hole, the value of those options will soar.
Next Article: Understanding the markets: Three survival strategies for crisis times
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