Why McDonald's and Wal-Mart Should Worry Dow Jones Investors

The uncertain economic news that has plagued the Dow lately would ordinarily help value-oriented consumer stocks. What's wrong this time?

Feb 10, 2014 at 11:00AM

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) started the week on an uncertain note, falling 42 points as of 11 a.m. EST to give back some of last week's hard-fought gains. Many investors are focusing on the testimony that new Federal Reserve Chairwoman Janet Yellen will give to Congress tomorrow and Thursday, looking hard for clues about whether recent weak economic data could prompt a change in the expected course of policy at the central bank. But of even greater concern to investors should be the fact that stalwart stocks McDonald's (NYSE:MCD) and Wal-Mart (NYSE:WMT) aren't serving their traditional function of protecting Dow investors from losses, as both are down more than 1% again today after fairly dramatic declines recently.

The latest news on McDonald's monthly same-store sales figures shows the great divide between conditions in the fast-food giant's international and domestic businesses. Overall, comps rose 1.2% in January, with a 2% gain in the key European region and an even faster 5.4% for the Asia-Pacific region, which includes China. But U.S. same-store sales fell at double the pace investors had expected, dropping 3.3%. The unusually cold weather in January might have been part of the cause. However, the company's longer-term trend of slowing growth points to possibly more fundamental problems that could keep the restaurant chain from attracting new value-seeking customers if the economic downturn proves to be more than just a short-term phenomenon.

Meanwhile, Wal-Mart's declines show the extent to which having a discount-oriented model can backfire under certain circumstances. Some analysts point to the fact that with lawmakers choosing not to extend unemployment benefits, Wal-Mart and other retailers that market to lower-income shoppers could see a big hit in the short run. At the same time, with Wal-Mart at the center of the minimum-wage debate, the retailer could see further cost pressures in the near future. Moreover, Wal-Mart is having to address the competitive pressures that Amazon.com (NASDAQ:AMZN) has introduced to retail, with initiatives like trying to offer same-day delivery arguably distracting the company from its core mission of offering top value to its bargain-conscious customer base.

Ordinarily, underperformance from McDonald's and Wal-Mart might indicate a strong economy that was encouraging customers to move up to higher price-point competitors. Yet with the Dow struggling and signs of economic stress, the failure of these two stocks to react positively is a troubling problem that could blossom into worse news in the near future.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and McDonald's. The Motley Fool owns shares of Amazon.com and McDonald's. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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