Investors are standing at a bit of a crossroad, trying to determine which direction this market may trade. We've seen bear markets in the past, but even during the selloff in 2011 the fundamental growth was still explosive. History tells us that when fundamentals decline that it is a real threat to the immediate future of the market. In 2011 the decline was based on fear and uncertainty that surrounded debt negotiations, the first downgrade in U.S. history, and other political issues. Yet fundamentals remained strong.
What's interesting about the last couple months is that A) the market is trading at much higher levels than in 2011 therefore giving more room to fall and B) all of the safe havens that have led the market higher have been the first to fall. Think about it, in the last year the market hasn't been led higher by small and mid-cap stocks, but rather large Dow components and other large cap stocks such as Apple. Other stocks such as Intel (INTC), General Electric (GE), IBM (IBM) and 3M (MMM) have all been market laggards, while in the past these stocks were resilient. Therefore, I am taking a look at a few stocks that may follow the trend and become laggards that push the market lower.
Home Depot (HD) has been on a tear for the last two years, returning gains of more than 65% during the last year alone. The reason for its gains has been some strength in the housing sector, or in the prices of homes. However, its sales growth has been moderate while the company's bottom line grows by double digits. The company has consistently improved its margins, therefore, when you think about it, Home Depot's trend is similar to what is leading the market lower. Home Depot sees moderate sales growth and then cuts costs to improve the bottom line. This is what we've seen the last few weeks, as companies beat on the bottom line, but have seen flat to zero growth on the top line. The company still pays a good dividend and has the reputation as a safe haven. However, I am curious to see how it performs when it announces quarterly earnings. I have a feeling that it could experience the same fate as other safe havens that have fallen in the month of October.
Wal-Mart (WMT) traded flat for 10 years but has contributed to the market's rally with its 32% return over the last year. The difference between Wal-Mart and Home Depot is that Wal-Mart continues to grow earnings by a remarkable level, and has done so over a period of many years. The stock is still very cheap, trading at just 13.86x next year's earnings. However, with it reaching all-time highs last week it is very possible that this outperforming stock could see a pullback. I think its chances of continuing to trade higher, or maintaining its gains, are greater than Home Depot. But if the company posts a weak quarter next month then it could possibly fall below $70.00.
Besides Apple, Walt Disney (DIS) is my favorite large cap company in the market. It's a company that will stand the test of time and will always emerge regardless of the economy. With that being said, the stock has rallied 44% in the last year, but has traded back-and-forth between $50.25 and $53.00. The stock is now priced at $50.75 and with any additional selling pressure the stock could fall into a new range. However, unlike Home Depot which I feel is overvalued, and Wal-Mart which could very well fall and remain flat, I believe that because of Walt Disney's growth, any weakness should be seen as an opportunity. The company has a five-year return on investment of 8.76% and EPS growth of 9.47% during the same period. Therefore, the company is growing at a rate that is consistent with performance and should continue to see long-term strength, but may fall due to weakness in the economy and because it could fall below its support.