Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
The Dow Jones Industrials (DJINDICES: ^DJI ) continued its dance around the 16,000 level Tuesday, this time closing on the low side of the milestone as investors generally seemed reluctant to push stocks back to record-high levels before finding out the Federal Reserve's intentions for monetary policy in the near future. Looking at the biggest decliners on the day, though, consumer stocks were well-represented, with Coca-Cola (NYSE: KO ) , Procter & Gamble (NYSE: PG ) , and Home Depot (NYSE: HD ) all posting drops of more than 1%.
For the most part, none of these three companies came out with specific news explaining their declines. Home Depot rival Lumber Liquidators issued lackluster guidance, but that might just as easily be seen as a mark of confidence in Home Depot's stranglehold over the home-improvement industry. Meanwhile, Coca-Cola and Procter & Gamble typically fly under investors' radars toward year-end, as consumer-oriented investors pay a lot more attention to retailers in their key holiday seasons to see if they'll stand up to intense competition and sales pressure.
But one trend that could be taking hold in the final weeks of 2013 relates to rebalancing. The Dow is up more than 20% this year, with broader benchmarks having posted even stronger returns in 2013. As a result, many investors are looking for places to pare back on their stock exposure, and one natural place to look is in mature companies with high multiples without the growth potential to back them up. All three of those stocks have earnings multiples above 20, raising questions about whether they might be overvalued after solid gains in recent years.
Still, painting a broad brushstroke across the industry seems ill-advised. Home Depot doesn't seem to fit that mold particularly well, as it still has plenty of growth opportunities despite its mildly lofty P/E ratio. Home Depot is projected to grow at an 18% annual clip over the next five years, and as long as the housing market continues to move higher, Home Depot can expect more homeowners to have the capacity to make improvements and spend money at its stores.
For P&G and Coke, though, the argument makes somewhat more sense. With much slower growth projections of 7% to 8% annually, neither consumer giant seems to have the potential to live up to the promises that their 20+ P/E ratios are making. Coca-Cola has had to deal with its growth headwinds from greater regulation and health-related scrutiny, and Procter & Gamble has tried to defend itself against aggressive rivals in key growth areas like emerging markets. In that light, declines like today's could be the beginning of a trend away from pricey consumer stocks -- and toward companies with better growth prospects whose shares offer better value.
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