Are Investors Fleeing the Dow's Consumer-Facing Stocks?

Are Investors Fleeing the Dow's Consumer-Facing Stocks?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The stock market is once again leaving investors uncertain about its future course, going on a rollercoaster ride that saw major market benchmarks climb near the open, fall in the morning, and then head back upward modestly. As of 12:45 p.m. EDT, the Dow Jones Industrials are up 53 points, while the S&P 500 and Nasdaq Composite measures have posted more substantial gains of around 0.5%.

But lagging behind in today's short-term Dow recovery are several consumer-oriented stocks. Typically when markets reach high levels, cautious investors gravitate toward consumer stocks, which are seen as less volatile, in order to protect their profits. But when investors expect bull-market conditions to continue, they trade in their conservative consumer stocks for investments that will rise more sharply in price in a favorable investing environment.

For instance, Disney is down about 0.6% even as the multimedia entertainment company continues to enjoy solid long-term growth prospects. With the stock trading at 20 times trailing earnings, some value-conscious investors might question whether they're overpaying for future growth, given the threat of competition on numerous fronts. As rival sports channels go up against ESPN and the pressure builds to deliver ever-increasing results with blockbuster movie releases, Disney investors foresee a future in which the company will have to work harder to meet expectations. That in turn could hurt margins and reduce profit growth, threatening the long-term valuation of the stock.

Johnson & Johnson , well known for its consumer health care products, has declined by 0.7%. Although the company has won an appeal upholding a patent infringement verdict in its favor, J&J's stock is trading at a lofty multiple to trailing earnings, taking away some of the margin of safety in its business. Moreover, with the company increasingly relying on its pharmaceutical business for its best growth prospects, J&J faces higher risk than it once had and is exposed to shifting competitive currents among treatments for various diseases and illnesses. That sort of volatility isn't necessarily what investors are looking for from consumer stocks.

Finally, AT&T , down 0.8%, isn't technically a consumer goods company, but the telecom giant relies on consumers and their discretionary income to buy popular mobile devices and its accompanying service contracts. Indeed, the response from AT&T to rival T-Mobile USA's first-mover early-upgrade plan marks a major shift in strategy for the mobile business as companies try to squeeze more smartphone sales from impatient consumers even as many smartphone makers have seen sales pressure from a lack of innovative new product offerings. If AT&T can keep its service prices high while effectively eliminating subsidies, it could be a huge win for the company. But if AT&T has to reduce what it charges consumers for their plans, the move could backfire.

Despite AT&T's attempts to bolster its profit, there's really just one company sitting at the crossroads of smartphone technology as we know it. You might never have even heard of the company, but it should reap massive profits regardless of which smartphone-maker ultimately wins the mobile wars. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further."

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Johnson & Johnson and Walt Disney. The Motley Fool owns shares of Johnson & Johnson and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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