Is McDonald's on Its Way out of the Dow?

By Markets Fool.com

The stock market pulled back on Monday morning, giving back just a small portion of its big gains from last week as investors looked at several of the looming threats to the 6-year-old bull market. As economic tensions rise in Europe and the likelihood of an imminent Federal Reserve interest rate hike rises, the Dow Jones Industrials opened with modest losses to start the week, falling 44 points as of 111:30 a.m. EST. One of the stocks to blame was McDonald's , and some investors increasingly wonder whether the fast-food giant deserves its place among the 30 stocks in the Dow.

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McDonald's fries are top-notch, but the stock hasn't been as appealing. Image source: McDonald's.

Golden arches no more?
McDonald's stock has performed poorly recently. The stock fell 1.5% this morning, and that brought its losses since mid-2014 to about 6% even when you include its generous dividend. That compares to a climb of more than 1,000 points on the Dow over that time frame, showing just how much McDonald's has underperformed recently.

The latest bad news from McDonald's came in its January global sales report, in which the restaurant chain reported a 1.8% drop in comparable-store sales worldwide. The company's domestic business did reasonably well, with comps up 0.4%, and Europe also showed solid performance of 0.5%. But in the Asia-Pacific, Middle East, and Africa segment, McDonald's comps plunged 12.6%. On the positive side, McDonald's breakfast offerings performed well domestically, even as stiffer competition sapped some revenue.

The problem McDonald's faces in Asia is that its brand has taken a lot of damage following incidents in Japan and China. In Japan, several foreign objects discovered in food items have put McDonald's on the defensive, and allegations of using expired meat in China led many customers to avoid many of the items on McDonald's menu there.

Starbucks rising
Anytime you consider removing a stock from the Dow, you have to think about which stock would take its place. Starbucks has a market cap that's about three-quarters of McDonald's right now, but it has been in its ascendancy, with its shares having quadrupled over the past four years. That compares to gains of just 70% for the Golden Arches' stock since 2010.

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Source: Starbucks.

Much of Starbucks' gains have come from solid fundamentals. Rather than being a low-cost provider for value-conscious customers, Starbucks has built up its reputation as a premium establishment, and that allows the coffee giant to keep margins high. Like McDonald's, Starbucks has extended its reach around the world, but it hasn't had to deal with the quality concerns that its more food-based counterpart has dealt with repeatedly. With pricing power and a dedicated core customer base that is aligned with the importance of high-quality beverages, Starbucks would make a reasonable replacement for McDonald's in the Dow.

With McDonald's having been a Dow stock only since 1985, there's not nearly as much historical baggage involved with replacing it as there would be with some of the Dow's older components. The tradition-conscious Dow will inevitably be slow to make such a change, given the iconic importance of the fast-food giant. In the long run, though, McDonald's will have trouble holding off Starbucks and restoring itself to its former glory.

The article Is McDonald's on Its Way out of the Dow? originally appeared on Fool.com.

Dan Caplinger owns shares of Starbucks. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.