Will a Soaring Dow Leave Defensive Stocks Behind?

The Dow Jones Industrials started off the quarter on the right foot today, but some slower-growing stocks missed out.

Dan Caplinger
Dan Caplinger
Jul 1, 2014 at 12:00PM

The Dow Jones Industrials (DJINDICES:^DJI) had gained 125 points as of noon EDT Tuesday. Encouraging signs of economic growth bolstered investor sentiment this morning, and the prospect of closing at a new record level appeared to build momentum as many shareholders seemed once again to buy even the tiniest of dips in the Dow. Yet the big updraft in the index largely left out defensive stocks Coca-Cola (NYSE:KO) and Wal-Mart (NYSE:WMT), with the two stalwart Dow components sticking close to unchanged. As the Dow keeps climbing, will the bull market pass Coca-Cola and Wal-Mart by?

Source: KB35, Flickr.

Coca-Cola actually fell just under breakeven as investors assess whether the company has much growth potential left. Defensively minded shareholders have already bid up prices of the beverage giant's stock to lofty levels, with Coca-Cola stock fetching more than 20 times forward earnings. Yet most investors who follow the stock believe Coca-Cola will have difficulty growing its business at faster than a single-digit percentage pace in the long run, and challenges both from its archrival and from smaller players in the beverage industry pose as big a threat as the move away from Coca-Cola's namesake carbonated drinks. Coca-Cola's investment in Keurig Green Mountain appears to be a play toward furthering its growth ambitions, but even global publicity from key sporting events might not help the core beverage business regain its past growth trajectory.

Source: Wal-Mart.

Wal-Mart climbed a tiny bit Tuesday, but the big-box retailer still faces plenty of difficulties looking forward. Even as Wal-Mart begins selling goods online in India and works at bolstering its global e-commerce footprint, the company still must deal with the huge head start that online rivals have. Perhaps more important, though, Wal-Mart has had surprising difficulty in adapting its store concept to emerging-market economies, despite the fact that its price-conscious philosophy has a great deal of appeal in areas of the world where its customers aren't as affluent as U.S. consumers are. Moves such as expanding its grocery offerings to include organics could draw more attention to Wal-Mart, but if shoppers keep moving away from big-box retail toward more accessible store locations, then Wal-Mart will need to execute well on its Neighborhood Markets store initiative in order to restart its growth engines.

Of course, the whole point of defensive stocks is to hold up well during down markets, not chase the Dow as it soars toward record highs. Nevertheless, both Coca-Cola and Wal-Mart have significant hurdles to overcome before they can guarantee positive results for shareholders in the long run.