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

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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  • Report this Comment On February 10, 2014, at 9:25 PM, highgrowthcarson wrote:

    MCD and wmt are two companies on the wrong side of powerful, most likely irreversible long-term trends. MCD's reputation for serving unhealthy food that only poor folks would ever eat will cause continuous erosion as the world gets richer and as eating healthy (what rich people and celebrities do, regardless of whether 'healthy' is actually any healthier) becomes the aspirational lifestyle of pretty much everyone.

    As for wmf? Well Sam is gone and Bezos is simply too tough for present management. Long term decline as brick and mortar retail gradually dies. Nothing much wmt can do about it. Their time is simply past.

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