McDonald’s and Charles Schwab have been outperforming the market this year, but now may be the time for investors to sell the stocks, according to James Demmert, chief investment officer of Main Street Research.
Demmert appeared on CNBC’s “Power Lunch” on Monday to share his opinions on where he thinks some of the biggest stocks in the market are headed. Here are his thoughts on the two stocks to sell, as well as one name he encourages traders to buy.
McDonald’s
Although shares of McDonald’s jumped 5% Monday following its fourth-quarter results, the move higher belies the weakness in the earnings report, Demmert said. Although earnings came in line with consensus estimates, revenue was weaker than expected due to a large drop in same-store sales.
“Those golden arches look good on the market today, but the report was awful. They missed what was already a low bar,” said the investor.
The stock’s climb higher on Monday is the perfect opportunity for investors to sell on the strength, Demmert added. The stock is already trading at 23 times earnings, with limited further upside potential in a very competitive market, he added.
“There’s many more modern brands in fast, or ‘faster’ food, such as Cava,” Demmert said.
McDonald’s has logged a nearly 7% gain year to date and over the past 12 months
Charles Schwab
Broker Charles Schwab is another name investors should look to leave, according to Demmert.
The stock fell more than 2% Monday after TD Bank Group announced it would sell all of its $1.5 billion in shares in the company, representing a 10.1% stake.
“You don’t want to wake up as a public shareholder or company and find out that your largest stakeholder is selling shares. That’s really some overhang on the stock,” Demmert said.
Although Schwab has announced it would buy back the stock, Demmert expects it to remain a headwind that will limit the stock’s ability to rise despite a strong growth rate.
“With this overhang of one of the largest shareholders selling, I think it’s going to put some brakes on the stock’s ability to go to higher,” said Demmert. “I think this is a stock that — yes, maybe buy it cheaper — but here we’d be a seller.”
Shares have advanced almost 10% year to date. Over the past 12 months, the stock has gained more than 28%.
SAP
The European market offers opportunities at compelling valuations, Demmert said, offering software company SAP as one example.
The investor described SAP as a way to play the artificial intelligence trend. It is “a great example of second derivative AI in this early part of [the] AI tech-led bull market,” he explained.
It’s “sort-of like — if you will — larger than Oracle, or maybe a Salesforce, and has a platform similar to ServiceNow,” he added.
Profits have jumped more than 28% over the past year, and the company recently reported a top- and bottom-line beat.
SAP is also “a great way to play a foreign stock that we think will be spared by Trump tariffs,” Demmert added.