The Dow Jones Industrials (^DJI 0.40%) on Monday closed at a record high for the third time this year and did so in a more assertive fashion with a gain of 112 points. Long-term optimism on the geopolitical front outweighed short-term concerns on independence referendums in eastern parts of Ukraine, and gains in Asia following China's move to free up investment in its internal economy worked their way westward as well. Yet disturbingly, although many technology and financial stocks posted more extensive gains than the Dow, blue-chip stocks McDonald's (MCD -0.91%) and Coca-Cola (KO)actually posted very small losses Monday.
Given that it has returned to within pennies of its own all-time closing high, McDonald's doesn't seem like much of a disappointment. But with its flat share-price performance over the past year, the fast-food giant has lagged behind the Dow Jones Industrials by about 15 percentage points, and sluggish growth prospects have been largely to blame for the underperformance. One particularly large source of concern is that even as the U.S. economy has been doing better than its counterparts in Europe and elsewhere around the world, McDonald's U.S. results have been worse than its overall figures: U.S. same-store sales fell 1.7% in the first quarter of 2014 even as comps in Europe and the Asia-Pacific region posted gains. With investors expecting only single-digit growth rates in earnings for the foreseeable future, McDonald's will have an increasingly difficult time justifying share-price multiples if it can't accelerate its profit gains in future years.
Coca-Cola faces similar issues, with U.S. soda consumption on the decline both in the sugary and diet categories. For a long while now, Coca-Cola's opportunity in the U.S. has been on the still-beverage side of the business, with tea, sports drinks, juice, and flavored waters delivering better performance than the company's namesake carbonated beverage. Internationally, though, Coca-Cola has seen its business hold up better, with China enjoying 6% better soda volume on 12% total-volume growth during this year's first quarter. Russia and Brazil also posted gains, and Coca-Cola has relied on high-profile sporting events such as the Winter Olympics in Russia and the upcoming World Cup and Summer Olympics in Brazil to further its marketing aims. Still, with the stock making essentially no gains since mid-2012, Coca-Cola needs to reawaken its growth engines if it wants to get back into favor with investors.
Slow-growth stocks often lag the Dow Jones Industrials during bull markets. The key, though, is assessing whether Coca-Cola and McDonald's are so expensive that they won't provide the downside protection investors count on from their shares. If not, you could have even greater disappointment from the two Dow components in future.
