McDonald’s Corp – Do our EBV lines Work?

We get asked all the time about our EBV (Economic Book Value) lines and whether they work.  We have the advantage of seeing these lines work for almost 15 years.  To us they work beyond a shadow of doubt, because of our experience.  I realize that to new eyes, EBV lines are a bit hard to swallow.  I can appreciate this, since I was skeptical at first, however over the years and in so many situations market prices react differentially around each company’s calculated EBV lines.

The How and the Why they work is not covered in any of our published work, and even if we did tried to explain our first concepts of our EBV lines I doubt whether it will help anybody understand the interaction of market prices around these lines.  Patience is needed, and observable situations over time will hopefully convince our readers the valuable market information that can be learned by intersecting market prices with EBV lines.

Reviewing Model Price charts, which I do on a daily basis, I came across the chart on McDonald’s Corp. – MCD.  McDonald’s has been in rally mode since 2008 breaking over $100 in January – February of 2012.  As with all large cap stocks, after a big run-up, MCD was looking for a place to rest, figuratively speaking.  So where does it rest?  EBV+6, of course.

Here is the chart

McDonald’s Corp. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of MCD subsequent to this post will be maintained on Facebook, here.

My Three Observables on this model price chart.

1.  The stock price hugs EBV+6 exactly.  We grow McDonald’s balance sheet with forecast earnings estimates, less dividends, so our users can see the growth of the future EBV lines.  It is amazing to see stock prices conform to this growth in our calculated EBV line.

2.  You can observe the stock price of McDonald’s, drifting downward from the center of the zone (What we call the space between our EBV lines), until the stock price reaches EBV+6, which is support for the stock price.  I have long believed that the study of Technical Analysis is really observations made about pricing without our calculated EBV lines.  Once EBV lines are calculated and placed in a chart format, you can see why support and resistance of the stock price actually occur.  The important difference between our work and Technical Analysis (which we don’t use) is calculated EBV lines can seemly predict support and resistance stock prices in the future – A critical difference in my opinion.

3.  Stock price variability seems to dissipate around these structural lines.  As you can see on these weekly bar prices of MCD’s, price variability has collapsed.  We don’t know why this happens, it just happens.

I have been looking at these Model Price charts for a decade and a half, and I still pause when I see a chart like McDonald’s.  Amazing!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s