Why Best Buy, Staples, and ADT Held Back the S&P's 1st-Quarter Gains

2014 has been a challenging year for the stock market so far, but the S&P 500 (SNPINDEX: ^GSPC  ) has at least managed to post a small gain of about half a percent since the year began. That comes despite the fact that Best Buy (NYSE: BBY  ) , Staples (NASDAQ: SPLS  ) , and ADT (NYSE: ADT  ) have all plunged during the first quarter of 2014, posting declines of more than 25% and helping to prevent the S&P 500 from enjoying better overall performance.

Best Buy dropped 34%, with nearly all of the electronics retailer's losses coming in mid-January after it said that total sales during the key November and December period had fallen 2.6%, leading to a drop of 0.9% in domestic same-store sales. Even though online sales climbed 23.5% from the previous year's levels, the need for huge promotional activity in a highly competitive electronics-retail environment led investors to near-panic about Best Buy's future prospects. Perhaps more importantly, after such a huge run-up during 2013, anything short of perfection was enough to send shares tumbling. So far, Best Buy has done a good job of sustaining its share price at current lower levels, but it also hasn't made much progress in signaling efforts to boost shareholder returns either.

Similarly, Staples fell 28% after its early March earnings report, in which the office-supply retailer said that same-store sales fell 7%, producing a 4% revenue decline even after closing more than 100 store locations. With customer traffic having declines substantially, Staples has had to respond with even more cost-cutting measures, including further imminent store closures to cut 225 more locations. The big question is whether Staples can see the same success as Best Buy in boosting online sales, where it really needs to excel in order to make up for lost revenue from declining store counts. That's a tall order given the competitive situation online, but it also represents the company's best bet in the long run.

ADT declined 26% as the home-security specialist faced growth concerns of its own. Even though sales rose 4%, ADT's fiscal first-quarter earnings per share dropped 11%, as weaker margins reflected more competitive conditions in the market. As cable companies and other providers seek to use Internet-based home-monitoring systems to compete against ADT's core products, the need for ADT to introduce forward-looking initiatives that have a competitive moat becomes even more critical. Yet ADT has enough debt to make it difficult to maneuver effectively, and distractions like ill-advised share repurchases have arguably taken ADT's focus off rebuilding its customer base.

Even though these stocks are only three out of 500 S&P members, their future could have a defining role in the direction for the entire stock market. In particular, given their high profile status, Best Buy and Staples need to demonstrate their ability to rebound in order to reassure investors that their problems won't ripple throughout the key retail sector and affect the entire U.S. economy.

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