WALL STREET THESE DAYS likes the taste of McDonald's.
Wednesday, Goldman Sachs is telling clients to buy calls to benefit from potentially strong April earnings, and the addition of fruit smoothies to the chain's menu this summer.
And last week, J.P. Morgan Securities advised clients to buy calls on McDonald's (ticker: MCD) to participate in an "excellent low-risk/absolute-return opportunity."
John Marshall and Maria Grant, Goldman's influential options strategists, told clients to buy McDonald's June $70 calls, which cost 86 cents when the trade was modeled, and the stock was trading at $67.81. The trade will "break even" if the stock advances 4.5%.
Steven Kron, Goldman's restaurants analyst, rates McDonald's as "Conviction List-Buy," one of the top ratings the bank assigns to stocks. Kron's enthusiasm for the stock stems from an expectation of rising sales, continued margin gains, and lower commodity costs.
Ahead of first-quarter earnings that are scheduled to be released April 21, Goldman's options strategists say McDonald's options prices imply the stock will move 3%, up or down, when earnings are reported, compared to a median move of 2%, up or down, during the past four quarters.
If the past is prologue, the launch of the smoothies could seriously energize the stock. When McDonald's launched McCafe drinks, the stock gained 5% in a week.
However, anyone who trades McDonald's options is banking on a view not reflected in the stock or options, but rather expected by analysts and strategists.
McDonald's stock is up about 9% year-to-date, lagging Burger King (BKC), which is up 13%, and also the 31% gain for CKE Restaurants (CKR), which operates Hardee's, among others, and is the subject of a takeover battle.
The challenge for McDonald's -- and thus the risk for investors -- is posting results that convince investors that its revenue growth is sustainable in 2010.
In these situations in which market watchers might be ahead of a stock, low-priced options can help investors to better balance the risk and reward. With options prices at unusually low levels for reasons mostly attributable to the stock market's slow advance, some options are even cheaper than McDonald's dollar menu.