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Dow Slumps 114 on Fed Guidance, Zulily Stumbles

By John Divine – Mar 19, 2014 at 6:23PM

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Even Walt Disney stock didn't have the magic touch Wednesday; Ulta Salon continued its post-earnings rally

Just a day after every single sector in the stock market posted gains, all 10 sectors finished in the red. Newly appointed Federal Reserve Chairwoman Janet Yellen took Wall Street by surprise Wednesday, as the central bank said interest rates may rise even if the jobless rate doesn't improve much. While the Fed is concerned that inflation could get out of hand unless rates gradually rise, neither Wall Street nor Main Street are enthralled with the idea of rising borrowing costs. The Dow Jones Industrial Average (^DJI -1.19%) shed 114 points, or 0.7%, to end at 16,222.

Walt Disney (DIS -1.16%) lost 1.8% Wednesday, as it continues to be one of the most volatile stocks in the blue chip index. Disney shares have caught fire in the last few years, and have rewarded investors with 42% gains in the last 12 months alone. While I myself am a staunch believer in the company's vision, execution, and unmatched portfolio of intellectual property, businesses and stocks are different beasts. The P/E of Disney's stock has steadily expanded in the past two years, from about 16.5 to about 22.5. Investors are paying 36% more for every dollar of Disney's earnings than they were a couple years ago; if that multiple starts making its way back down to earth, shareholders will feel the pain. 

Ulta Salon, Cosmetics, & Fragrance (ULTA -1.44%) investors can testify to this pain firsthand. Stock in the beauty retailer cratered 20% on a single, cold December day after quarterly earnings disappointed. In a matter of months, Ulta's P/E halved, going from 54 to 27, sending the stock down nearly 40% in the process. With expectations hopefully under control now, the stock trades at 32 times earnings, and is up more than 10% since reporting an impressive quarter last Friday. Shares continued their post-earnings rally, adding 2.7% Wednesday. 

Finally, shares of Zulily, Inc. (NASDAQ: ZU) didn't take well to the downturn today, shedding 4.7%. Here again we should be careful to separate the company from the stock price: the company is on an absolute tear, growing sales from $18 million in 2010 to nearly $700 million in 2013. Zulily came out of nowhere in just a few years, finding success as a niche, mom-facing flash sales e-commerce site. But this flash sales all-star could be just a flash in the pan, a risk that might not be fully factored in to the stock's valuation, with shares exchanging hands at 132 times next year's projected earnings.

John Divine has no position in any stocks mentioned. You can follow him on Twitter, @divinebizkid, and on Motley Fool CAPS, @TMFDivine.

The Motley Fool recommends Ulta Salon, Cosmetics, & Fragrance and Walt Disney and owns shares of Walt Disney. 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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