The Dow's Early Gain Fizzles: Why Are Wal-Mart and Home Depot Falling?

The Dow Jones Industrials gave investors another roller-coaster ride in early trading Tuesday, initially soaring 100 points on positive earnings news from two components but then giving up all of that gain in the next half hour. As of 11 a.m. EDT, the Dow was actually down 10 points. One of the more surprising aspects of that drop was that two retail giants -- Wal-Mart and Home Depot -- were among the biggest losers in the Dow, despite strong economic data yesterday pointing to improving retail sales. Given the vital role that both companies play in retail, investors need to understand why these stocks gave up ground amid what appeared to be a favorable environment for the sector.

Source: Home Depot.

Wal-Mart's 0.8% drop followed an analyst downgrade that expressed fears that the retail giant would miss out on the overall gains in retail activity. Even though the economic recovery has lifted financial prospects for millions of American households, the low-income families that Wal-Mart relies on for its business remain under pressure, with recent reports from dollar-store competitors confirming the overall trend. Meanwhile, despite Wal-Mart's best efforts to position its website to offer customers flexibility in ordering options, including store pickup and experiments at same-day delivery, competition from online-retail specialists continues to challenge the company's ability to grow. The big question will be whether Wal-Mart's customer base will eventually share in financial gains from the recovery and return to their former higher-volume shopping habits.

Home Depot's 1.2% decline is harder to explain, especially since (unlike Wal-Mart) the home-improvement retailer didn't participate much in Monday's Dow rally. Home Depot has a different seasonal dynamic than most retailers, with the coming spring season being the most important for the company and its industry peers. What Home Depot is counting on is that customers hit hard by a long winter will come out in droves to celebrate the arrival of spring, leading to greater revenue growth even than the retailer is used to seeing at this time of year. Yet Home Depot faces the concern that winter weather is still lingering throughout much of the nation, potentially creating even further delays and adversely affecting the last month of its fiscal second quarter.

Investors should always look beyond the day of a news release like the retail-sales data yesterday to see what kind of follow-through action stocks present. In the case of Home Depot and Wal-Mart, shareholders are clearly skeptical that the two companies can sustain any momentum from favorable economic signs.

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